The start of 2020 saw an increase in M&A activity as most shareholders and management teams were bullish about the year, following the outcome of the General Election and clarity that emerged regarding Brexit. The worldwide pandemic brought about by Covid 19 now means the M&A landscape is expected to be somewhat more uncertain.
With the immediate emergence of COVID-19 and the widespread disruption reaching all parts of the economy and society, deal activity largely stalled as parties took stock of the business impact with many businesses having to close completely.
At the time of writing and with the Governments plan of easing lockdown restrictions now published, it is likely that many businesses will be planning how to safely return to workplaces in the short-term.
A restart-like scenario for businesses coupled with the tapering of government schemes such as the job retention scheme (the now extended furlough scheme) and ceasing of CBILS debt capital may lead to many businesses feeling cash flow strain in the next six to twelve months. Cash flow will also be impacted by changes in consumer demand, availability of critical supply chain, payment of deferred taxes and overhead bases returning to normality.
It is vital that businesses are well capitalised during this period to trade through it successfully. There are a range of capital options available to businesses during this period including; debt through mainstream banks but also debt capital provided by secondary and tertiary lenders and equity capital through venture capital, VCT funds and private equity.
In the next six to nine months, we would also expect there to be an increase in distressed M&A as some businesses will struggle to deal with balance sheet liquidity having failed to plan appropriately or where balance sheets are too weak to withstand the headwinds. Management teams should therefore be focussed on short-term cashflow planning and medium-term reforecasting to identify any funding gaps early.
Having said that, traditional M&A remains alive and is underpinned by interest in a range of sectors that are proving to be resilient during the current crisis. Whist many sectors are closed for M&A some are not. These sectors include but are not limited to healthcare, technology-enabled businesses, software, parts of the digital segment, online retail, food services, financial services, communications and IT.
Many equity funders have recently raised new capital which means there is a large amount of capital looking for a home at the moment, making it an ideal time to consider equity funding given equity terms are highly competitive with fewer investable opportunities in the market.
With the availability of large pools of capital and equity funding, the interest in resilient sectors is accelerating during this period despite the economic unrest, largely due to these businesses proving to trade successfully during COVID-19. Funders are keen to support businesses with the need for working capital funding, development and growth capital, businesses wishing to pursue an M&A strategy and to a more limited extent shareholder liquidity.
Transactions that have concluded during the period of unrest include the investment in utility technology business One Utility Bill led to DSW Angels, LDCs investment in e-commerce fulfilment business James and James, BGFs investment in online recipe box business Gousto, Wavecrest and Beringeas investment in EDITED, a provider of real-time retail information and Mercias follow-on investment in health and safety technology business Notify.
This has also been a busy period for Cavu CF, having recently advised HIG Capital on the acquisition of Vernacare, a manufacturer of healthcare hygiene products and supplier to the NHS from Palatine Private Equity, followed recently by advising a leading midmarket private equity fund on an investment.
Specialising in the equity and debt markets has been a key theme over the last 7 years at Cavu CF and we have worked with a number of quality management teams and dynamic businesses.
It is vital for businesses to continue granular planning during this period and to keep close to trusted advisors. As a leading corporate finance boutique, Cavu CF have unrivalled expertise in debt and equity markets and have successfully assisted many clients with planning and raising finance, including during COVID-19.
