South West region remains attractive for transaction and funding

Featuring Andrew Killick | 26th January, 2018

It’s great to see such a variety of transactions and development funding being raised for a wide range of businesses across the West Country. Although in 2017 deal volumes are down 10% across the South West compared to 2016, they were still at a higher level than for eight of the last ten years – showing the continuing attractiveness of local companies to acquirers and funder.

This level of deal activity has been partly caused by an unusual combination of factors:

  • Uncertainty regarding future EU trading relationships;
  • Risk of political change; and
  • Risk of significantly higher capital taxes.
  • All of this at a time of:
  • Low interest rates;
  • Low capital tax rates; and
  • A ‘Wall of money’ seeking an adequate return that it can’t get from a deposit account. This has resulted in more potential sellers at a time that significant funding is available from a mass of sources with many at low rates. Crucially, this level of funding and a strong acquirer’s appetite has helped to keep prices and the value of businesses up, thereby further encouraging more business owners to sell and retire. The range of funding available has continued to grow rapidly with new alternative providers entering the market on a seemingly daily basis. There are many new funder business models emerging and the differentiation between debt and equity has become very blurred with some even providing money that is ‘repaid’ as an on -going small percentage of turnover. However, the price of a faster approval process and a perceived easier application for many of them can be a significantly higher interest cost – alternative finance is still best for higher risk projects where traditional funders won’t provide the funds – even at higher interest rates.  While funding has been widely available recently, there are still businesses that find it hard to obtain. If there is any restriction in debt availability going forwards (which we have started to see develop in certain sectors of the equity market) entrepreneurs should be even more incentivised to adequately prepare their funding proposals to maximise their chances of obtaining the money that they are after. From an investor’s perspective Government ‘encouragement’ in the form of continuing tax reliefs, such as the Enterprise Investment Scheme (EIS) together with new ones such as the Innovative Finance Individual Savings Account (IFISA) that is commonly used to support Peer 2 Peer lending, has helped more money to be directed to entrepreneurs. Unfortunately there was a significant drop in the number of Management Buy-Outs across the region in 2017, meaning that most transactions were between corporates rather than business owners selling to the management teams and employees that had helped them create their own wealth. Many such transactions were driven by the synergistic benefit that a corporate acquirer would gain thereby enabling them to out-bid the MBO team. Looking ahead, many Advisors in the region are talking of a healthy pipeline that they are currently working on which should result in a robust performance for the first quarter. However, if there is increased uncertainty and funding becomes more restricted, it will be hard for 2018 to beat last year’s deal volumes. From our own perspective the near term outlook is very positive and over recent months we have recruited a further six team members to our full time Corporate Finance team. This means that we now have 11 Partners and Directors and a full support team to help entrepreneurs across the region to achieve their transaction and funding aspirations.
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