In our Opinion

A banker is someone who will lend you his umbrella when the sun is out, but ask for it back when it starts to rain.

Quite clearly, as far as the average banker is concerned, it has been pouring with rain in the UK for some time.

Given the inclement weather in the debt markets, some private equity houses have begun to step into the breach with larger equity cheques or ‘all equity’ finance as a means of completing quality deals. In fact, 2009 statistics from the Centre for Management Buyout Research show that the use of equity in buyout transactions has risen rapidly to a new high. While equity only amounted to 36 per cent of the average deal structure for all buyouts in 2005, in 2009 this rose sharply to 63 per cent.

But if investors are tiring of sitting on their hands, why are we not seeing more ‘all-equity’ transactions completing?

The reality is that the majority of investors are prepared to consider this type of structure only on the basis that the acquired company can be refinanced within 12 to 18 months. But the closure of the debt markets has resulted in reduced visibility and a lack of confidence, which makes this type of transaction singularly difficult at the top end of the market.

Where small and medium-sized businesses are involved, however, both the equity and debt requirements in transactions are lower and more manageable. Furthermore, the banking market is more open to refinancing this level of funding. Mid-market funds can, therefore, be more adaptable and fleet of foot than their larger counterparts when considering ‘all-equity’ deals.

In place of bank debt, for example, KCP last year completed the BIMBO of Fly53, in which we provided a sensibly priced, mezzanine-type instrument alongside our equity investment. We will look to refinance this layer of ‘debt’ with more traditional bank finance once the banks are more open for business.

In our equity gap space, of investments in businesses with an enterprise value of between £5 million and £25 million, ‘all equity’ deals are a viable option. For those who concentrate on larger value investments, they may not be quite as feasible, and we are likely to see a continued dearth of innovative, big-ticket deals as a result.