This is a hugely challenging environment for businesses everywhere. H.I.G. Capital is a global investor focused on providing long-term capital to companies in the lower mid-market size range (companies with an enterprise value typically between £25m-£250m). We have just over £1 billion of capital committed to investing in the European marketplace via both our US and European offices (London, France and Germany). Currently, we are seeing economic stress across most sectors. Recurring issues include:
- Slowing growth or indeed reducing market size
- Increasing pricing pressure, margin erosion, and risks from exposure to underperforming customers and/or suppliers
- The impact of volatile exchange rates
A lack of financing options for most business situations The lack of available capital or financing is a concern for both private and quoted companies. The quoted sector, in many respects, is a less forgiving environment for smaller cap businesses looking to raise finance than for similar businesses in the private arena. Potential problems may include:
- The difficulties of corralling a large number of shareholders (with different attitudes and capital constraints) to support a fund raising when the market outlook is uncertain.
- The additional burden of public company regulatory/reporting costs to manage within the constraints of overall business cashflow.
- In the event of operational under performance, historic balance sheet over-gearing and/or a share price decline the transparency provided to current and potential customers and suppliers can create trading issues.
- Potential employee morale issues if the share price is affected through underperformance and/or finance raising issues.
- Where a business strategy is acquisition led and predicated on the continued availability of debt and equity finance, sentiment towards a business and hence valuations/ability to raise growth capital can suffer on the assumption the business model is ‘broken’ – a self fulfilling situation.
- The time taken to recover from historic profits warnings.
There is less bank liquidity available, however it is still possible to raise additional debt finance with the caveat that you need to have a good track record and provide some certainty around future trading. It can be much more expensive though, if not in relative interest costs (given lower interbank rates but higher margins) then in higher fees, lower quantums and tighter covenants. So what are the other options to raising capital?
Traditional rights issues are available to the ‘right’ companies. Key to success will be the ability to prepare a compelling strategy and plan as much focused on cash generation as profit growth. Fund managers have less capital and are more selective; hence it is potentially key to focus on ‘winning over’ influential institutional shareholders early and to getting the raising right first time around.
PIPE investments – Private Investment in Public Equity – are another option. A private investor may provide capital via the subscription for shares in a public company or the investment in a convertible instrument. This has traditionally been a significant market in the US, whereas the European market is less developed with fewer potential capital providers.
A delisting via a public to private transaction is also available to quoted companies. This provides a number of advantages:
- A single institutional shareholder and the opportunity to work with an investor unencumbered by historic ‘baggage’
- Removal of public market disclosure requirements and associated costs
- A focus on the long-term business plan – A private equity investor’s time horizons are typically 3-7 years
- The opportunity to deleverage and reduce potential supplier, customer and employee concerns given long term investor support
Our view for the next twelve months in the UK is very tough and “batten down the hatches” as the right approach in general. However, we are cautiously optimistic from an investment perspective and believe that the current climate will produce interesting opportunities across the spectrum. We are currently talking to a number of public companies around providing a PIPE solution or in fact delisting via a public to private transaction.
Paul Canning is a Managing Director of H.I.G. Capital, a leading global private equity investment firm with more than £5 billion of equity capital under management. Prior to joining H.I.G. Capital, Paul was a Partner at Gresham Private Equity, which he joined in 1997. Paul has led a number of successful investments across a variety of sectors including most recently H.I.G.’s investment in Europa Facility Holdings, a fast growing facilities management company. Previously, Paul worked closely with UK small cap companies whilst at Royal Bank of Scotland, which he joined from KPMG.
