The life and less ordinary times of LDC

Today’s business environment offers excellent conditions to consider buy and build strategies. Pockets of the economy look ripe for consolidation, valuations for sub-scale businesses are at realistic levels and despite the continued economic uncertainty, management teams are now very selectively looking at how to capitalise on possible growth opportunities.

A starting point is that management need to get their macro analysis right. Any sector needs to have the right conditions and a consistent approach. The four main areas to consider are:

• market stability and in particular pricing issues
• product and customer synergies
• operational overlaps
• supplier fragmentation

With the pricing issue for instance, price volatility can make modelling and forecasting the benefits of any acquisitions more problematic whilst supplier fragmentation means that consolidation offers real cost saving and service enhancement benefits.

Management must develop a coherent strategy for its acquisitions. Buy and builds work best when the approach supports strategic growth that enhances a services or product offering to an existing customer base from which additional commercial value can be obtained, or provides a compelling offer to a new customer base.

Having decided on a strategy, management have to then decide how to finance it, consider their best funding options and put together an acquisition finance package for companies pursuing a buy and build strategy.

In implementing the strategy it is important to ensure that the right companies that are being targeted. Often management can be dazzled by companies with good brands or reputations in their sector, or those that are growing quickly, perhaps in the hope of discovering what business alchemy they have conjured up to emulate their success instead of focusing on companies that will really improve their service.

Once a company has been acquired it is important to focus on developing a chemistry with the incumbent management team. Don’t to assume their trust and confidence, but be sure to engage early, inform them on any outline plans and consider their thoughts and opinions. Transparency and trust wins their support for the strategy.

Plenty of pitfalls exist in implementing a buy-and-build, but if companies keep these essential factors in mind they should reap the considerable rewards such a strategy can deliver.

Notes

LDC is a supporter of Buy and Build opportunities. Over the past 24 months the LDC team has supported a number of ‘Buy and Build proposals – including Angel Springs, EDM, Microlease and Kimberly Access.

As suspected the private equity market in 2012 has made a steady but unspectacular start. As with other business markets, and with a glass half full perspective, we hope it will build up. That said this year even more so than the previous two will rely heavily upon a pick-up in general business confidence.

By mid-2012 we do believe there will be an increase in demand for development capital, particularly among mid-market companies, triggering some investment competition from funds, many of which have been sitting on cash for the past few years waiting for a propitious moment to re-enter the market.

Businesses with ambitious management are increasingly eager to approach private equity houses for management buyouts largely because the economic landscape in 2011 proved far less rosy than expected. Moreover, some businesses are not convinced that holding onto their assets will necessarily increase revenue further down the line. Therefore, even if there isn’t significant improvement in economic conditions throughout the first half of 2012, many businesses will still press ahead to pursue transactions as the year progresses.

While the proportion of deals led by private equity firms last year seemed to diminish in favour of corporate trade buyers, we believe this will be reversed in 2012. Corporates became increasingly competitive in the mid-market acquisitions market during 2010 and 2011. Just as there was a decline in availability of cheap debt and reduced levels of leverage accepted by lenders in buyout deals, corporates which had strengthened their balance sheets during the financial crisis emerged as more competitive rivals in the hunt for deal opportunities.

Sharp deterioration in business confidence since the summer has, however, forced many would-be trade buyers to become cash hoarders once again, leaving an opportunity in early 2012 for forward-looking private equity firms to regain initiative and invest in growing businesses led by strong management.

In terms of exits, there is no evidence to suggest that the volume of transactions will dwindle in 2012. Over the next 18- to 24-month period we expect a flurry of potential exits as mid-market private equity strengthens. While the exit environment will remain somewhat constrained because of continuing uncertainties in the global economic environment, good businesses with proven management will still attract new finance and ownership.

Note – In 2011 LDC completed 17 new business transactions investing over £300million of equity, and in addition committed over £60million in two funds, and supported a number of companies with their acquisition and ‘buy and build’ programmes. LDC’s most recent transaction was the MBO of Pertemps Network Group.

In association with StartUp Britain, Mischcon de Reya and Baker Tilly, LDC is supporting a  master class aimed at helping companies looking for potential funding options. The full details are provided below:

Free legal master class for growing companies: raising money in difficult economic times

Essential tips to maximise your potential funding options

Content Essential tips to maximise your potential funding options
The master class will discuss the options, and how to improve your chances of success:

• Business Angel
• Venture Capital 
• MBO 
• Top tips from the inside – the venture capitalist’s perspective�
  • What works and what doesn’t
• 99% perspiration / 1% inspiration
  • Be prepared – due diligence is key
• Business plan/pitch documents�
  • Make or break…your chances of success 
  • Follow the money…

This session will be followed by a 30 minute Q&A.

Chaired by Andrew Rimmington, Partner, Corporate Department – Mishcon de Reya

Panellists:

• Duncan Cheatle, Co-Founder of StartUp Britain and Founder of the Supper Club
• Kevin McCarthy, Head of Private Equity – Mishcon de Reya
• Tim Farazmand, Managing Director – LDC
• Rowan Williams, Partner – Baker Tilly 

When: Wednesday 8 February 2012, 8.30am to 10.30am (breakfast from 8.30am)

Where: Mishcon de Reya, Summit House, 12 Red Lion Square, London WC1R 4QD

To secure your place at this event, click here

Directions to Mishcon de Reya

Add this event to your calendar

How can I attract an investment Partner? By Yann Souillard, Managing Director LDC South.

In today’s uncertain economy, many businesses in search of strategic advice, operational guidance and funding are turning to private equity specialists to allow them to capitalise on the growth opportunities. So how can companies like these attract a potential investor?

For a relationship-focused backer like LDC the starting point will always be the ambitions and quality of the management team. Understanding the motivations of the management team is one of the most important factors in our investment decision. A business with an experienced management team with the right mix of strategic and operational strengths will naturally be in a position to thrive with the support of the right private equity backer. 

Also when considering whether to back a company, the first operational area a private equity house will review is its financials – the fundamentals of any firm. Investors will want to see evidence of good financial management, sustainable growth, as well as a defensible forward business plan. 

It is therefore crucial to present a strategy based on realistic projections with strong visibility of earnings, to allow investors to appraise your organisation’s expansion potential.

Other key factors that will increase your attractiveness include demonstrating a strong understanding of the main structural trends in your marketplace, highlighting key service differentiators that will help you outperform your competitors, and how your business strategy is aligned with your customers’ needs. 

Private equity backers typically look for businesses with the potential to deliver upper-quartile returns, so firms that are scalable have a valuable proposition, particularly those with products and services that have sustainable international demand. LDC’s own overseas presence offers significant benefits for companies looking to develop strategic partnerships and cross-border trading opportunities. 

Ultimately though, a decision often comes down to chemistry and whether both parties feel they are the right fit to work closely together to take the company to the next stage of its growth.

Last week LDC, in conjunction with CBBC, held a seminar on the practicalities of expanding business into China.

This event was hosted by LDC at our Vine Street offices and our guests, MDs and CEOs from Mid Market businesses, heard from a number of contributors about the financial, tax and legal implications of making this move.

Whilst a full report can be found in the attached document both LDC and CBBC would like to thank the speakers at this event, Nick Emmerson and Sharon Shi from Eversheds, Maria Carradice and Craig Wilkinson from LDC, Steve Roberts-Mee from UK Export Finance, and Duncan Levesley, Senior Manager at CBBC.

A list of speakers and their biographies can also be found here.

For more information about LDC’s operation in Asia please contact Craig Wilkinson by email at cwilkinson@ldc.co.uk