High interest rates (debt expensive), lower transaction deal values (most sub £10m regionally), and global uncertainty, have led to a reduction in private equity (PE) deals over the past three years. PE investors aim to turn or sell investee companies and groups after three to five years. Recently, many PE investors have held their investments longer.
However, signs are more positive, with interest rates starting to fall, global uncertainty reducing a little, and deal values rising. We are seeing predominantly corporate buyers, and some non-PE investment buyers investing in the UK from Europe. The latter are like PE, but hold businesses for the medium to long term in order to generate growth and synergies from a wider group. We are also now seeing a sign that PE deals are coming back, building some much-needed momentum. Moreover, some sectors that have been quiet, are beginning to recover.
We recently sold Martin Randall Travel to Piper Private Equity. This is the first PE travel deal we have completed for a while, although we have other deals in the pipeline. Travel is a sector I have worked on throughout my career, and we are an ABTA partner firm, supporting on regulatory issues. The sale to Piper Private Equity shows confidence in the travel market as, of course, PE requires significant projected returns on investment to justify their involvement in a business.
Other sectors we have seen activity in are the care sector, non-urgent ambulance (E-Zec Medical Transport to Cairngorm Capital Partners), leisure (Whyte Bikes to Cairngorm Capital Partners), Wi-Fi cable installation (Lightning Fibre backed by the Foresight Group). We are expecting continued interest in Tech and AI.
Which businesses suit private equity?
There are some requirements common to businesses which successfully attract PE, irrespective of sector. Target businesses need to be of a certain size, to absorb the additional costs of a PE investor and provide the resilience PE investors require. Although there is no absolute rule, up to £10m revenue businesses will typically use angel investors, asset finance or other forms of borrowing.
Once one goes upward of £10m revenue with healthy profits, then PE becomes an option. PE investors operate at different levels of the market, from growing entrepreneurial businesses to global pre-‘initial public offering’ businesses. Investors will often sell target businesses to one another in secondary or tertiary deals, as those target businesses grow and the coaching/capital requirement and connections change.
Management teams are critical to any PE investor. Management is required to invest personally (‘skin in the game’) and will warrant a business plan. The management team will deliver the growth the investor needs to achieve its return.
Building an effective management team can take time, as you need experience and the ability to move a business onto its next stage of growth. Often businesses will work with business coaches to find and build a management team ahead of an exit or PE investment, which can take several years.
Typically, PE is used to transition a business into a new level of growth. This may be moving from a regional to national market, developing technology, or to become more international/setting up overseas subsidiaries.
The immediate future
2023/24 has been challenging for PE, but for businesses interested in this as a route to growth or extracting value, now is the time to develop plans. Once there is certainty following the Budget, we believe the PE sector will begin to move, both realising investments and making new investment. We see plenty of ambitious businesses in the South East who fit the PE model of ambition and future growth, but not all have their strategic plans or management teams in place.
As a firm, DMH Stallard is sponsoring the Private Equity / Venture Capital Deal of the Year category in this year’s Insider’s South East Dealmakers Awards. Submissions are due in by the November 7th, with the awards ceremony taking place in February 2025. We look forward to seeing the strength of submissions and the variety of Private Equity deals that will have been completed this year in our region.
