As I mentioned in my last blog post, the risks and uncertainty caused by COVID-19 have resulted in a financing gap that needs to be filled by less risk-averse lenders. Going forward, debt advisory will, therefore, play an increasing role in M&A activities. That is why I have dedicated this blog post to debt and capital advisory – and asked my colleague and expert on the matter, Morten Permin, to contribute as well.
Delayed deal activity
When selling a business, it can be difficult to raise acquisition finance. This is also evident if you look at Deloitte’s Alternative Lender Deal Tracker, which monitors 60 leading alternative lenders and their deal activity primarily within Europe. According to the survey, deal flow has declined by 29 % in H1 2020 compared to H1 2019. As advisors, what we are experiencing in the market is not that these deals are cancelled but are delayed for a period and starting to return. However, raising acquisition finance is becoming increasingly challenging for all but the most attractive deals. In order to tackle this, we highly encourage dealmakers to engage debt and capital advisory services in every business sale. This ensures that there are no surprises later in the process, which can at best cause a delay and at worst impact the enterprise value or even kill the transaction.
A divided market - where healthcare, TMT and financial services are the hot sectors
We are seeing a bifurcation of the market. Those businesses that are resilient, perceived to be safe and with reliable cash flows are attracting huge competition from lenders to provide finance at very attractive terms and pricing.
The appetite for financing deals especially within the healthcare, Technology, Media & Telecommunications (TMT) and financial services sectors is strong.
These sectors continue to drive strong demand and the overall commercial terms are not far from pre-COVID-19 times – as funds are primarily being deployed in the resilient industries. However, those businesses which are in a sector reliant on discretionary spending or have been impacted by COVID-19 restrictions, e.g. business and leisure travel, restaurants, hotels and energy, are finding it very difficult to attract financing or pay significantly elevated pricing compared to the beginning of 2020.
Preoccupied banks give room for direct lenders
Banks are somewhat occupied with their existing portfolios and have a reduced risk appetite for acquisition finance deals, which makes it challenging to maintain their market share. In addition, Debtwire reports that bank clubs are becoming scarcer as the banks are becoming nervous as club deals are practically impossible to get out of. This, however, provides an opportunity for less risk-averse direct lenders to gain traction in the Nordic region and increase their market share. Utilising alternative and flexible capital from direct lenders can empower businesses to grow – with little or no equity dilution.
For certain sectors, such as software, that attract high multiples, the additional leverage a direct lender can provide helps fund the higher enterprise value, reducing equity contribution and improving returns for a private equity firm. Looser terms and greater flexibility in terms, along with EBITDA adjustments, can also be beneficial to private equity buyers, providing comfort that they will be able to manoeuvre and manage the business in the future if issues arise with the trading performance.
When aid packages run out, distress kicks in
While there is a considerable amount of dry powder in the market, the inexpensive lending options currently offered by governments to help businesses stay afloat has stopped turnaround and opportunistic lenders from deploying it in a meaningful way. This will change as government support is withdrawn, so I expect that distressed M&A and complete restructurings will rise over the next two years, as businesses aim for long-term solutions to their capital structure. Therefore, my next blog post will dive into this subject.
Stay safe and have a Merry Christmas!
Sigurd er partner i Deloitte Corporate Finance og er leder af Deloitte danske Financial Advisory-afdeling. Sigurd har mere end 15 års erfaring med corporate finance-rådgivning, herunder bla. køb og salg af virksomheder, børnoteringer, afnoteringer, værdiansættelser og due dilligence.