article
Manifesto for Confidence
04 November 2008
Roger Birchall, Corporate Finance Partner at law
firm Browne Jacobson, provides an insight on lifting corporate
confidence and bringing back much-needed belief to the private
equity markets
The slowdown in the economy has had a profound
effect on all areas of business and whilst the credit crunch has
taken its toll on the mergers & acquisition market in the
Midlands, there are steps companies can take to bring confidence
back to the market.
Whilst the private equity and venture
capitalist communities are still seeing investment opportunities
coming through the door, little activity is actually taking place.
This is due mainly to poor liquidity and lack of confidence in the
global banking world, which has restricted available funds.
This is compounded by a reluctance of sellers to readjust their
value expectations to reflect the current economic and financial
situation and an increased focus by equity houses on issues and
opportunities within their existing portfolios.
Whilst the economy looks like it may have to
get worse before it recovers, the question on the lips of the
region’s FDs and would-be buy-out teams is ‘What can we do?’ As any
seasoned investor knows, it’s all about the elusive ‘c’ word –
confidence. Clearly, there will be no overnight panacea to the
problem of poor bank liquidity, but what are the tangible, positive
steps that businesses can be taking now to begin to rebuild market
confidence and maximise their opportunities to raise finance?
An innovative set of measures is needed to
kick-start the market. While the tax breaks for smaller companies
mooted last month is a good start for the general economy, a more
‘self-help’ approach is needed to bring back confidence to the
Midlands market. To rekindle confidence in the marketplace four key
factors are critical in helping to secure finance and bring back
much needed confidence.
Potential lenders need to see a demonstration
of responsible, sound management. This may require reviewing
capital expenditure and cutting costs but as long as the actions
are responsible and prove the company has a grip on its finances, a
lender is much more likely to provide a helping hand.
Payment terms can be optimised and adhered to
by maintaining regular, transparent communication with customers,
suppliers and lenders. Communicating with third parties benefits
everyone. Weaker suppliers may need to be supported during
turbulent times, but what comes around goes around and one business
may be able to utilise customers who have stronger credit ratings
for vendor financing arrangements. However, the most important
aspect for finance directors is to focus on building a strong
relationship with lenders.
Whilst the banks are the most obvious choice
for capital injection, there are other sources that should be
considered during these times. Companies often forget about other
options available when it comes to finance, but if the banks aren’t
budging on the lending front, companies should consider other
approaches, such as asset based lending (invoice discounting, stock
or trade finance) to extract more value out of the balance sheet or
the bond and private placement markets. This not only opens up
other avenues, but also reduces the reliance on bank credit.
Finally, companies should look at spreading
the lending and spreading the risk via multiple lenders. Lenders
are even more risk adverse when the economy is in this situation,
so taking the reliance off one sole lender reduces the financial
commitment and increases the likelihood of receiving the capital.
However, the downside to this option is it can be difficult to
maintain a strong, close relationship with everyone involved.
The road to recovery in the M&A and private equity markets
is unlikely to be swift or easy, but businesses need to plan for
future growth and ensure that they are building solid foundations
for growth opportunities when they return.
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