Business exit and de-risking – when is the right time?

11 June 2020

Shareholders that are considering the sale of their business, or an event which enables them to raise capital on the back of their business to derisk their personal financial exposure, may be wondering if that will be possible over the next 12 months, and if it is the right time to do so. 

The right time is a function of three things: 

  1. The right time for the shareholders 
  2. The right time for the business  
  3. The right time for the market  

It is rare that all three of these stars align simultaneously and therefore in most deals there is some compromise.  

It may well feel that now is not the right time to raise money on attractive terms, however, consider the following.

  • In an RSM survey of 150 private equity firms:
    • over 78 per cent of private equity firms expect to deploy more capital into their portfolio companies to support acquisitions; and
    • almost 70 per cent of private equity firms anticipate making a new platform investment this year from a process started after social distancing measures.
  • More generally, we estimate £3.2 billion was raised by UK headquartered private equity funds focussed on the UK SME funds in 2019 alone. Private equity must invest these funds in order to raise new funds and ultimately to survive.
  • Competition is high among private equity funds and their challenge is to differentiate themselves. Some have done so by setting up funds specifically designed to aide 100 per cent share sales whereas others focus on de-risking. Numerous funds including Pricoa, Metric Capital, Three Hills Capital and All Seas Capital have strategies designed to allow a shareholder to release cash in return for a minority stake in the business. They are designed to partner with the shareholders in SMEs or family businesses and to take a yield-based return. They suit cash generative businesses as the structure is debt like in nature and consequently the returns to the fund are lower and so is the cost to the shareholder.
  • 39,651 businesses globally are private equity owned. A large proportion of these investments have a defined strategy of growth via acquisition, usually over a period of 3 – 5 years. Where these businesses are performing they will be hugely motivated to continue acquiring.
  • Since the coronavirus outbreak, RSM has seen transactions fall away due to trading being significantly impacted in the target business or the acquirer’s business. However, for businesses that continue to trade well or that will make a quick recovery and can clearly demonstrate their resilience, we have seen values hold up at pre-coronavirus levels because the investment case is clear.
We have tested the appetite of private equity over the last few weeks for opportunities coming to market imminently. Interest is strong for high quality assets. There are fewer opportunities coming to market currently and therefore good investments are attracting a lot of attention, naturally this will go to pricing.

Charlie Jolly, Head of Private Equity

If you are interested in exploring the options available to you and your business, please contact 

Charlie Jolly Charlie Jolly

Partner, Head of Private Equity Coverage

Clodagh Tunney Clodagh Tunney