insights
Cash through COVID
The COVID pandemic has highlighted the importance of access to finance for businesses and how relying solely on working capital inflows may not be enough in trickier trading times.
PEMCF had a strong 2019. What didn’t catch our attention was China notifying the WHO on 31 December of cases of “pneumonia of unknown cause”. The rest is history.
PEM Corporate Finance had a strong 2019 with a good volume of transactions. Come New Year’s Eve we were going into 2020 with a great pipeline. What didn’t catch our attention was China notifying the World Health Organisation on 31 December of cases of pneumonia of unknown cause detected in Wuhan.
The rest is history – Q1 2020 was busy but all transactions hit the buffers at the end of March.
The news since is increasingly encouraging despite continued uncertainty. After a period during which businesses were working out their strategy and addressing short term cash needs, we’ve experienced a steady flow of once paused transactions coming back to life.
With a fair wind we’d now hope to have a raft of deals to complete this autumn, both company sales and buyouts. And new enquiries are picking up.
Why the strong transaction activity in difficult times? There are four key drivers: Liquidity, sector strengths, strategic buyers, and tax.
Chief amongst the drivers is continued liquidity available from the banks which have done a sterling job delivering government schemes and continue to have appetite for new lending. As ever this only really applies to the right proposals.
Private Equity funds too have huge sums of uninvested capital which they must spend to get returns and closed-ended funds are against the clock to do so. For example, in our region Foresight raised a specific East of England fund and are keen to start investing it.
Some sectors, such as retail, are really struggling, and transaction activity is concentrated on those which continue to prosper including technology and healthcare – but pick your winners carefully! Strategic buyers interested in those sectors have cash and are back actively seeking deals.
Finally, tax has been a driver. There’s been speculation that the Chancellor would raise funds towards his huge COVID-related debts by changing capital gains tax on company sales, abolishing Entrepreneurs’ Relief and increasing rates to nearer that of income tax.
We’ve been working on deals where the focus has been on completion before the Autumn Statement, and with its postponement until 2021, we’re getting new enquiries with a strong push to deliver in Q1 2021.
More uncertainty is the only certainty. We’re seeing this being tackled in deal structures offered by strategic buyers and PE houses with convertible instruments, earnouts, and other flexible structures.
This article originally appeared in the October/November edition of Business in East Anglia magazine.