Private Equity investors are increasingly involved in buying SMEs.
Trade buyers looking to purchase a business are finding themselves up against stiff competition from private equity investors. A decade or so ago, trade buyers almost always paid more for small and medium sized enterprises than private equity investors, but that is all changing. In fact, there’s been what one business exit specialist calls a ‘seismic shift’ towards private equity firms successfully buying up SMEs.
Private Equity is no longer a dirty word…
There was a time when small and medium sized business owners were warned against selling to PE buyers. Pressures to make large returns on investment often meant low valuations, while post-acquisition problems and poor deal structures plagued those who did opt to go with a PE buyer.
However, this is no longer the case and a recent report from EvolutionCBS, a professional services firm which specialises in helping businesses sell successfully, states that as of 2017, 14.65 per cent of all M&A deals involving UK targets valued under £50m involved an outright PE buyer. When the past 18 months is looked at in isolation, EvolutionCBS asserts that PE buyers had made offers in 83 per cent of its sales over the period, with four of its past six sales going to PE buyers.
Steve Barry, the firm’s client director, explained:” In these deals [we] have delivered a strong range of choice of trade and financial buyers to clients and 66.66 per cent of our clients chose PE over trade. This means PE are not only competing with, or outbidding, trade on value but the deal structures, growth story and future opportunities are increasingly more attractive to our clients than trade acquirers. This is a seismic shift from ten years ago.”
So why are PE buyers suddenly so interested in SMEs?
The are three main reasons for this shift in the M&A landscape for SMEs in the UK.
Private equity firms are facing growing competition for quality assets. There is a growing number of private equity firms in the UK and the amount of cash they are responsible for investing is also expanding rapidly. Acquiring SMEs has become a popular alternative target for investment and the amount PE buyers are willing to spend on businesses has risen as a result.
Samuel White, of EvolutionCBS explained: “The issue facing private equity is the availability of quality targets rather than access to funds. As a result, today, PE funds are paying full price for quality assets which is giving sellers even more choice when they come to sell.”
More assets under management
The total assets under the management of PE funds, globally, has risen to US$2.8 trillion - a record amount. A combination of favourable borrowing terms and cheap debt has led to investors swimming in cash and they are increasingly turning to PE funds for guidance. Investors want to see their money working hard and the pressure to generate strong returns on their investments has never been greater. Alongside this comes a greater level of involvement from individual investors, which, again, has impacted the way in which the funds invest their cash.
A move towards conscious investing
There’s little doubt that investors are paying more attention to where their money is invested, who is benefitting and whether the businesses benefitting from their wealth operate ethically.
Investing in SMEs has become a popular option for ethical investors using private equity funds to generate returns. PE house, IW Capital, has recently released a report showing that a fifth of investors want to invest in SMEs instead of stocks and shares. Among younger investors and those living in London, the interest in buying SMEs grows even further. Investors view buying SMEs as an ‘actively conscious’ investment choice, according to IW Capital and 29 per cent of London investors are opting for SME investment for this reason.
So what does this mean for sellers?
If you have a small or medium sized business to sell you are likely to welcome this new trend as it means greater choice and the chance to be more discerning about who you sell your business to. PE buyers don’t just bring with them large cash stocks, they can also offer expertise, experience and skills that can benefit your business post-acquisition.
Opting to sell to a private equity buyer is no longer a risky option. In fact, it can mean a meeting of minds that could spell a spell future for your business and employees.
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