UK: Using equity to bridge the gap
Following the drastic measures taken by the government to fight the COVID-19 pandemic, everyone is rapidly adjusting to what, for now, is the new normal of restricted movement, remote working and temporary business closures. Countless entrepreneurs and business owners no doubt feel like the rug has been whipped from beneath their feet, and many carefully constructed business plans to create shareholder value have quickly been replaced with emergency actions to manage short term liquidity.
The most immediate and common impact of COVID-19 for many will be a significant but temporary drop in sales, potentially resulting in material cash flow issues.
The well-publicised government schemes are summarised below, however there are significant gaps – especially for mid-market businesses. For short term liquidity requirements and beyond, owners may want to consider alternatives, including equity investment.
At Clearwater we have a deep knowledge of private equity (PE) and in 2019 completed 53 deals with over 30 different funds. We know the appropriate investors to engage with to find the right solutions for your business.
Government measures - recap
The Government has moved with speed to announce a raft of measures to minimise the impact of COVID-19 on businesses including:
- Coronavirus Job Retention Scheme
- Coronavirus Business Interruption Loan Scheme
- COVID-19 Corporate Finance Facility
- VAT and income tax payment deferrals
- Grant funding and business rate relief (for certain sectors such as leisure, retail and hospitality)
These measures are welcome but not without limitation. For example, the Business Interruption Loan Scheme is only available to qualifying businesses with turnover of less than £45m and the COVID-19 Corporate Finance Facility is only available to investment grade businesses – meaning a definite gap in remedies for the mid-market in terms of accessing capital.
A challenge for mid-market businesses accessing funding (in or out of these government schemes) will be bandwidth within their existing lenders. While debt remains a cheaper form of funding for businesses there are considerable advantages to securing alternative sources of capital such as equity investment.
While the immediate attention of PE and other institutional investors will be on their portfolio companies, the fact remains there are record levels of funding to deploy and through our constant conversations with investors we know they will continue to invest and back strong management teams. We have seen first-hand how PE are implementing creative structures to accommodate the uncertainty of COVID-19.
Selling a stake in your business to an equity partner is a big decision however, and some points to consider would be:
- Speed – equity investors will typically move quicker than a bank (who will be inundated with loan applications currently)
- Cost – equity will be more expensive than debt
- Cashflow – equity investment is normally in long term instruments that do not add pressure to cashflows of the business
- Support – access to experienced investment professionals and their networks
- Expertise – Non-Exec Directors can add significant value
- Further funding – investors are generally keen to continue to back good management teams
We have strong relationships with leading equity providers who specialise in providing flexible funding solutions to strengthen balance sheets, provide development / replacement capital or accelerate growth.
Strengthen for growth
For businesses who are able to weather the immediate storm but deplete their cash reserves which in turn sets back their growth plans, it may be appropriate to consider selling a stake to an equity investor who specialises in providing both capital and expertise to drive future growth. This expertise can encompass anything from strategic input at board meetings, to acquisition support, portfolio benchmarking and sharing operational best practice.
Access to such growth capital could ensure businesses are ideally placed, when the time is right, to capitalise on organic growth opportunities or have the financial firepower to pursue an active M&A strategy ahead of their competitors.
Perhaps counterintuitively, the enforced lock down period could present an attractive opportunity for business owners to consider strategy, and ensure their companies are well capitalised and resourced to deliver the next stage of growth.
With a rich and respected heritage in private equity, Clearwater International remain in regular dialogue with investors with whom we have built up trusted and lasting relationships. Ongoing conversations allow us to stay tuned into the very latest developments and we know the providers to suit each set of circumstances.