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Kings of the jungle

1 Dec 08

It’s dangerous and unpredictable in corporate finance, but the sector’s top names in Scotland are broadly undaunted as we launch our annual who’s who, Andrew Beach, Richard Goslan and Robert Outram discover

They are the big beasts of the corporate savannah, relentless in their quest for the next prey. But the corporate financiers and their advisers are now facing a long dry spell.

Corporate finance thrives on deals, and what makes this downturn especially dangerous is that, unlike previous recessions, the problems lie not just with the level of economic activity but with the liquidity in the system. Paralysis in the money markets hit top end deals first, but with the turmoil of the past few months, transactions of all sizes have become problematic. The crisis is no longer confined to Wall Street and the City – the Scottish business scene is seeing the impact too.

“This is as bad as it’s possible to imagine it across the sectors,” admits Mary Campbell, founder of the corporate finance house Blas.

“We’ve been starved of cash in different sectors before, but at an economic level it is really, really challenging out there. There is a lot of fear and people are terrified of taking decisions on acquisitions. This kind of climate brings out lots of people who want to sell, but no one who wants to buy.”

Ewan Grant, Baker Tilly’s head of corporate finance in Scotland, sees the need for the dust to settle on the cataclysmic events of the past few months before the market can move forward.

“We need to take stock of everything that’s happened,” he says. “The business world has been shaken, but on a positive note there are still opportunities out there for companies which are strong to buy good quality assets.

“The equity markets are not an option right now for corporate finance activity on new admissions, either to the main market or AIM market for Scottish companies. If companies don’t have their own cash reserves, they don’t have a lot to turn to.”

George Frier, head of corporate with law firm McClure Naismith, says: “There has been a noticeable downturn in activity. Nobody is immune from the lack of confidence and even cash-rich trade buyers who might be looking for opportunities are probably sitting back until they feel confident and that the price is going to be right.

“There is still deal activity going on, and if you have a good deal with a sound business and where the funding for it is not going to be in doubt, then deals are able to be done.”

Barry Fraser, M&A director with Ernst & Young, says: “The credit crunch has created a turbulent market and virtually all industries and geographies are, or will be, impacted with a lack of credit, declining asset valuations, increasing defaults and new risks for companies across all sectors. There is an unprecedented number of bankruptcies and government interventions with extraordinary volatility in global stock markets and currencies.”

So how long might the downturn last? Alec Carstairs, head of M&A with Ernst & Young, says: “We haven’t reached the bottom yet, and the impact of the credit crunch is likely to persist throughout 2009. However, for smaller businesses, there is a feeling that Scottish companies are better placed than many. They know how to batten down the hatches and run an efficient business, with a focus on cash. There is a realisation that certain sectors, such as oil and gas, clean technology and healthcare, will trade more robustly than others in a difficult market.”

James Will, head of corporate finance with lawyers Shepherd + Wedderburn, says: “Initial public offers (IPOs) were still showing some life in January when we acted in the IPO of AsianLogic raising $100m [£67m]. By July, the public markets for IPOs were all but closed with only the oil and gas sector engendering institutional interest. The start of the oil price collapse that month killed any remaining IPO window and it is difficult to envisage any company currently starting an IPO process.

“Boards are not willing to spend time and money in preparing for an IPO until things change.”

But how about venture capital and private equity? Most equity deals have to be leveraged to some extent, so it would be tempting to see private equity houses and venture capitalists as an alternative to bank debt, but Steven Scott, director with Penta Capital Partners, believes the crunch creates opportunities as well as some very real challenges.

Scott says: “Businesses are struggling for alternative finance as the banks pull back. Our industry is well funded to be part of the solution but will struggle with the volume of opportunities.”

To some extent, Scott believes, mezzanine finance will emerge to fill the vacuum, but he warns that this involves a small pool of players who often rely on funding from the banks. He says: “Ultimately I expect we will see new debt and mezzanine funds appearing to replace the banks in private equity deals over coming years, lending lower multiples to lower priced deals.”

Activity is low but Scott believes next year could get more interesting. He says: “We have no plans to cut back our resources given the wall of dealflow we see coming as price expectations fall significantly in 2009, which has the makings of a very good year for private equity investing.”

The quest for alternative sources of finance means advisers will have to get creative. Neil Kennedy, partner with law firm MacRoberts, says: “We are seeing more joint ventures or strategic alliances used to share risk and resources. High net worth individuals, and the investment vehicles set up by them, are active.

“We would expect to see an increase in that activity – there will be bargains for those with the skills and resources to take at least a medium-term view. Angel syndicates are still very active and Government agencies and their private sector partners also remain active and I would hope that activity could be stepped up.”

He adds: “We also expect more asset-backed lending (for example invoice discounting and others) by the banks and other providers.”

If the banks find themselves strapped for cash, there are still wealthy individuals with an appetite to invest, according to John Waddell, chief executive of the Archangel Informal Investment business angel syndicate.

He says: “We are still very much open for business. We are not seeing a slow-down, and in terms of dealflow the credit crunch so far hasn’t made any difference.

“Funding is an issue in that if companies in which we are investing can’t afford or can’t get bank finance, that is challenging. Also, the crunch is affecting the sales of some companies, particularly those that sell into the sectors that have been badly affected such as financial services or construction.”

Waddell is guardedly optimistic: “It’s all a bit messy at the moment – we remain positive but we are being careful with our cash. People will be nervous about spending money on a new venture if existing investments are going to need additional unanticipated support.”

David Leslie, head of corporate finance for Scotland at PricewaterhouseCoopers, notes the rise of overseas funds as a source of capital, such as Qatar’s recent investment in Barclays Bank. He was also involved in one of Scotland’s largest transactions of the year, the £417m sale of Bodycote Testing Group to the US venture capitalists Clayton, Dubilier & Rice.

“That deal bucked the trend and showed that there is still activity out there,” says Leslie. “But there are still trade deals around, such as British Energy and EDF, Thus and Cable & Wireless, Clyde Blowers and Textron. I think you’ll find we’ll have a bit of a slowdown, but then the dealflow will start to pick up, and quite a lot of that will be fuelled by turnarounds.”

So where does all this leave the advisers? Andrew Croxford, corporate finance partner with Dunfermline-based Thomson Cooper, says his firm is coping with the economic situation by being “down on the beach, selling both ice-cream and umbrellas.”

“We’re sheltered to some extent by our significant corporate insolvency business, and that’s clearly been a buoyant market,” he says.

Croxford does see light at the end of the tunnel, however: “If there are more base rate cuts, and the banks start to pass on those cuts, then by early next year we’ll see more confidence going into the market again.”

Deloitte has no plans to restructure its corporate finance team but sees its focus changing, according to Ian Steele, the firm’s partner in charge of corporate finance in Scotland.

“The climate is such that corporate finance work which will be done in the foreseeable future is likely to be of a different type from what we’ve been doing in the past,” he says. “Quite a number of businesses are going to struggle or are concerned about banking covenants and cashflow, so there will be opportunities for advisers to help them through that by engaging in restructuring activity and consolidation.”

Calum Paterson, managing partner at Scottish Equity Partners (SEP), blames a crisis in confidence for the slowdown in dealflow as much as anything else.

Paterson’s own confidence is undaunted, however. He says: “SEP still has an appetite for new investments. The level of pessimism around suggests that it is a good time for buying. We have money to invest and venture capital is by nature long term.”

And Paterson believes we have already made it through the worst of this crisis. “I think we’re very close to the bottom now and that recovery will begin soon. Interest rates have been slashed, government action has been decisive and sanity has prevailed in the US. Many commentators are talking about a very long and deep recession, but I think the situation is stabilising now, recovery is on the way and markets are resuscitating.”

Mary Campbell of Blas believes we have reached a potential turning point in the way we want companies to operate, and the kind of economy we want them to operate in. She says: “In the 1930s, [economist Joseph] Schumpeter coined the phrase ‘capitalism is creative destruction’. In the financial services sector we’ve seen the destruction, but how do we get creative and say, what kind of economy do we want for our companies, and how are we going to ensure that’s what we get?”

For the full CA Magazine Who's who in corporate finance listings, click here to download the PDF

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