Fundraising? Don’t delay preparations
24 July 2020: Holly Stiles is a Corporate Finance Partner at Grant Thornton Australia. She says companies planning to raise funds post-COVID should prepare well and do so quickly.
Accessing funding at a time of crisis is not impossible: just harder. Of course, it helps to be a company entrenched in a sector seen as ‘COVID positive’, such as tech or health, or better still health-tech. Companies in other sectors will need to be well prepared in order to secure funding.
In looking to predict the future funding market, it is helpful to look back at the last major global crisis in 2008, when we saw an initial period of recapitalisation but then a prolonged period of reduced liquidity, both debt and equity. While the global financial crisis was, as now, a funding crisis, it started as a banking crisis that spilled out into the broader economy. It took three to four years for credit markets to stabilise – that is a number worth keeping in mind in the current environment. This current crisis started as a health crisis and has developed into an economic crisis. Its roots are not banking-specific, but the behaviour of the banks and other funders will be central to recovery.
What we saw in the public markets as COVID-19 struck was that primary equity fundraising fell off a cliff, but that the availability of secondary capital was initially strong. Stiles comments that as the pandemic struck, many listed Australian companies undertook large capital raisings to take advantage of the cash still being offered by investors to prop up their balance sheets as the crisis loomed.
True, a few initial public offerings have got underway in recent months – around the world as well as in Australia – but volumes are well down on pre-COVID levels. “In times of uncertainty and significant volatility in the market it is generally very hard to attract investors into an IPO. Investors don’t want to commit to new fundraising during a period of volatility, and may prefer to support companies that they have already invested in, so we are likely to see reduced IPO volumes for the time being, with the exception being those businesses that are thriving during the current market conditions,” Stiles confirms.
Companies seek debt funding
From the debt point of view, Australia has seen some big numbers. In fact, Australian debt secured by the private sector has been substantial as companies have sought debt funding to get them through tough times. “What we saw immediately when the pandemic hit was that a lot of companies drew down existing facilities or asked for support from their existing bank to get some cash on their balance sheets,” says Stiles.
“In Australia, the banks have been very supportive and reacted quickly when the lockdowns first hit, so it was relatively easy for companies to secure six months’ principal and interest deferrals. The banks also waived fees and charges to support companies to stabilise their businesses,” says Stiles.
The many government stimulus measures have been really important, the most significant in Australia being the JobKeeper program (the equivalent of the UK’s furlough scheme). That enabled many companies significantly impacted by COVID to get by initially without additional funding. The Australian government has recently announced a six-month extension to JobKeeper, due to significant fears of an economic cliff at the end of September when all the stimulus measures were due to end.
Also announced was an extension to the SME Guarantee Scheme, which provides relatively low-cost loans to businesses with a turnover up to $50m needing additional working capital. The extended scheme runs from 1 October 2020 until 30 June 2020 and will provide loans of up to $1m over five-year terms. That will definitely help smaller businesses with working capital funding needs, particularly as the other stimulus measures tail off. However, for businesses needing funding for a restructure, refinance, asset purchases, acquisitions etc, funding from the banks will be more challenging to secure.
Be on the front foot
So what should happen next? What should companies be doing? “Don’t delay preparations. Get ready for any funding needs. Be on the front foot. It’s going to be more difficult to access funding. Get yourself ready,” says Stiles.
“If funding is not available from your shareholders or your bank, then there is a wide range of other options: alternative capital, such as from the neobanks, fintechs, specialist credit funds, all the way through to hedge funds. It is a case of matching your business strategy and funding needs to the specific funding options available, considering how much you are willing to pay and on what terms,” says Stiles.
This is a time to show your full hand and document everything. A well-documented COVID-19 response and recovery plan is key, she points out, as is the ability to articulate the strategic changes a business is taking to respond to the market and how the business will operate during the recession and recovery period. Also on the to-do list is a robust forecast that tests various scenarios, a careful consideration of working capital and the preparation of due diligence materials.
Stiles cannot emphasise enough the necessity for good financial modelling. “Any funder or investor will want to look at historical financials, but more importantly they will need to see what is to come. Many small and mid-sized businesses do not routinely prepare detailed financial forecasts so will need to find skilled resources or seek assistance from external advisers,” she says.
Grant Thornton Australia is emphatic that good financial modelling is three-way – P&L, balance sheet and cashflow – and all three should be fully integrated. These models should be driven by assumptions that are clearly specified and can be adjusted by the user. Given the significant uncertainty at the moment, businesses should ensure they are able to run different scenarios in the model, considering the “what ifs”, such that a user of the model can toggle between them. And all outcomes for all scenarios should be presented clearly.
Importantly, points out Stiles, debt can take 8-12 weeks to arrange, and equity even longer. “Banks’ credit processes will be more thorough and will take longer than usual,” she says, “especially if you are not an existing customer. For non-banks and equity investors, there will be due diligence to be done and therefore even more time is needed.”
However, it is not going to be tough for all businesses, concludes Stiles. Funders and private equity investors in particular are still very actively seeking to invest in companies deemed to have been “positively impacted” by COVID-19. This brings us back to the favourite sectors of tech, health, or better still health-tech, but also B2B business, particularly those that are tech enabled and financial services.