Building long-term relationships with owner-managers and management teams, and working up succession and exit plans, is at the core of how PEM Corporate Finance develops its deal pipeline. The firm’s focus is on the East of England, but not exclusively. Our meeting in Cambridge is my first face-to-face Profile interview since COVID-19 restrictions were introduced in the UK almost two years ago. We discuss train links to the city, as well as the sectors represented across the region beyond tech and healthcare, in the immediate environs of PEM’s office near the railway station.
Almost 20 years ago, Scotsman-turned-East Anglian Lake Falconer was recruited by PEM to build a corporate finance lead advisory service. Lead advisory remains the main focus of PEM’s head of corporate finance and his fellow partner, Philip Olagunju.
“We’re experts in buying and selling businesses, management buy-outs, succession buy-outs, or management buy-outs from big corporates,” says Falconer. “Despite the other services, this has proved and remains a good way to win work. You have to find the bulk of your fee income from outside the firms’ client base, which I enjoy doing.”
He says on buy-outs the split is roughly 50:50 between vendor and acquirer advisory, but on corporate deals, they’re far more likely to be on the sell side: “That’s what management does a lot more of.”
PEM also provides business valuation. “It uses the same intellectual property,” explains Falconer. “And we get to talk to good businesses before they’re ready to transact. It fits really well with our succession and exit planning work.”
Olagunju adds: “When we pitch for new work, we provide a view on valuation. We don’t put forward pie-in-the-sky valuations. We never want to overpromise and underdeliver. Some clients tell us they want ‘X’ and so we have to break the news to them that a sober assessment of value is way underneath that and wish them all the best. Sometimes they come back and tell us we were right.”
The advice may be, essentially, to run the business for another two years and make changes to get the desired value. A conversation about a sale can become one about a change process. “If we proceed regardless, it will just end in tears,” says Falconer. “Some people will call a big number to get the job, but a lot of business owners see through that. Even if it means we don’t get the work now, we’re not shy about telling people to postpone a sale.”
Due diligence, while not the main focus, is something else the firm offers, using audit resource. While there are just six professionals in the lead advisory team, there are 200 professional staff across PEM. Often tax is a big part – but not the driver, says Falconer – of deals in the lower-to-mid market. PEM has a business tax team, well versed in advising on transactions, be it around tax due diligence or deal structuring.
Incoming investors
Of its deals market, Olagunju sees a perfect storm of circumstances: “Owner-managers traded through the austerity measures imposed by the UK government following the previous economic downturn in 2008. We’ve now had Brexit and all that uncertainty. Then COVID-19 knocked the stuffing out of a lot of entrepreneurs, who were possibly thinking about an exit. The pandemic has undoubtedly accelerated many plans. There’s a lot of vendor fatigue in the marketplace, matched with buyers – particularly financial buyers – with lots of dry powder to deploy.”
Private equity is on the lookout for opportunities in Cambridge and the wider area. In 2019, Foresight launched an East of England Fund with £100m ring-fenced for the region. The same year, BGF opened a Cambridge office.
Valuations are bifurcated between the best businesses and the others. Some tech businesses command eye-watering multiples. Olagunju says the biggest challenge is the impact of coronavirus. Earnings before interest, taxes, depreciation, amortisation and coronavirus (EBITDAC) has become the basis of calculations: “How to account for the impact of COVID-19 changes from sector to sector. If you’re in travel, hospitality or leisure, it’s a discount. Some in those sectors will bounce back completely, while others still have the handbrake on and might not get back. If you’re in healthcare or tech, there’s no talk about discounts – just about how much of the growth is sustainable.”
The sectors PEM predominantly advises are business services, tech and agrifoods: newer businesses, traditional ones and sometimes a combination. In October 2021, it completed the sale of Yagro, a data analytics business for farmers, to Frontier Agriculture.
Last year’s deals demonstrate the range of sectors. In March, PEM advised on the MBO of Falcon Tower Cranes, a Norfolk-based company that is the largest independent tower crane supplier in the UK. In May, it completed the Santander Growth Capital-backed buy-out of Laser 2000, a Cambridgeshire-based optics and photonics technologies company. That was a succession deal. PEM provided corporate finance and tax advice in July 2021 to Cambridge-based specialist low-carbon energy consultancy Element Energy, which was sold to ERM, the world’s largest pure-play sustainability advisory firm. In December 2021, it advised German private equity firm BID Equity in the sale of eSight Energy, a Cambridge-based enterprise energy management software specialist, to MRI Software. It had originally marketed the business on behalf of its founder owner manager and sourced BID as a buyer in 2018.
“All sub-sectors of tech are pulling ahead,” says Falconer. “Bioscience, advanced engineering cloud telephony, Software as a Service and Internet of Things are all in our pipeline.”
While the firm does not restrict itself to those sectors, it has developed something of a specialism. And Falconer says that with many of the geographic restrictions disappearing during the virtual world of lockdowns, vendors sought their specific expertise online.
“That has accelerated,” says Olagunju. “Before, people would never appoint a corporate finance adviser they found on the internet. But now they will.”
Networking remains a significant part of a market such as Cambridge. The Big Four have a presence here, but tend to do bigger deals and less volume than PEM. Grant Thornton has a large team in the city, where Darren Bear, the firm’s UK head of deals and business consulting, is based. BDO had made strategic hires in the region, as had the regional firms, including FRP and Price Bailey. All of these firms are, like PEM, members of the Corporate Finance Faculty.London is just a short train ride away, so tech advisers will travel from there. There’s an appetite for corporate finance networking to start again properly in the city. Cambridge is also, says Falconer, “well lawyered”. But the real challenge now is ensuring they take on the good prospects: “Time spent with not-so-good prospects is time not spent with great ones.” He’s seeing unsolicited approaches to businesses from multiple financial buyers. And strategic buyers, who also have cash to deploy, are commonplace in the local market. He points out: “The gap between buyer and seller mindset probably doesn’t exist at the moment. Long may that continue.”
THE CV…
Lake Falconer
Eighteen years ago, Lake Falconer joined PEM – the longest-established accountancy firm in the ‘city of perspiring dreams’ – as head of corporate finance, to build a lead advisory service line from scratch. At the time, he says, the firm was “just dabbling” in transaction services.
His career started nearly 40 years ago. Having graduated from the University of Glasgow with a degree in accounting, law and economics, he joined the audit department of Ernst & Whinney (now part of EY) in Glasgow. He qualified as a chartered accountant, and “escaped from auditing pretty much immediately”.
In 1986, he moved across the city to 3i: “It was a great place to learn about investing and portfolio management, and I had an enormous amount of training.” After six years, he left 3i to move south, joining the corporate finance team at Robson Rhodes in Cambridge.
In 1996, Falconer moved to EY’s corporate finance team in Cambridge: “I advised on lower and mid-market transactions – the stuff we now do at PEM.”
Before joining PEM, he had a “brief sojourn” in industry – as FD of Beaver & Tapley, a Nottingham-based, VC-backed struggling manufacturing business. “I learned all sorts of interesting stuff,” he says, somewhat euphemistically.
Today, his current office looks out on to where he started in Cambridge, although the actual building has been demolished as the area around the city’s station is being redeveloped.Investment firms, advisers and software companies, including Apple Research, are flocking in.
…And the deal
The sale of Mjog, completed in October 2020, opened Falconer’s eyes to what was possible with restrictions on travel and also reinforced the importance of tenacity. PEM won a competitive pitch against the Big Four in London to sell the Cambridge-based patient messaging technology business. “The selling point wasn’t just Mjog’s market share; it was about the opportunity because of where the healthcare sector was going,” says Falconer. “It was a good process and we got a cracking offer from a private equity fund, which I won’t name.”
The reason for the anonymity is that the buy-out house fumbled the process and the deal fell over: “Sometimes you have to run at the fence more than once and hope you get over it.”
His team figured the deal had potential beyond the private equity offers they had received – with trade – and ultimately found a Swedish strategic buyer, Kry International, which provides locum doctors via video.
“It was healthcare, software and strategic, and the buyer was very well funded. We completed an international deal and never met the buyer. I just never imagined that was possible.”
THE CV…
Philip Olagunju
For Philip Olagunju, 2021 was a landmark year. In April, he was promoted to partner. In November, he won Dealmaker of the Year at the Insider Central & East of England’s Dealmakers Awards. In between, he completed his MBA at the University of Bradford School of Management.
Olagunju joined PEM as an assistant director five years ago, having spent a year as FD of Luton-based manufacturing company DNC. He was part of the deal team advising DNC on its sale to HLD in 2016, then he joined immediately post-acquisition. “It wasn’t the most glamorous of businesses or places, but I learned a lot and had to get stuck in.”
He began his career in Nottingham, after graduating from nearby Loughborough University, as an analyst in RSM’s corporate finance team. He passed the Chartered Institute for Securities & Investment certificate and ICAEW’s corporate finance diploma, was promoted to executive, then manager. Then came two years with BDO in London, working on larger deals, including the Cinven-backed £950m secondary buy-out of CPA Global. “That was gargantuan compared with the bread and butter of my training. I was more a cog in that process, but it was a great experience.”
In 2013, Olagunju moved to Milton Keynes as a manager in Baker Tilly’s private equity and M&A team. Baker Tilly merged with RSM a few months after he joined and rebranded as RSM. “It ticked the right boxes: I was back in the regions and back focused on mid-market transactions.”
Four years later, Falconer recruited him. “It was an opportunity to focus on an interesting part of the economy – low- and mid-market entrepreneurial, owner-managed, fast-growing businesses, in a city primed for fantastic economic growth. By 11am on day one, I was in my first client meeting.”
Since 2019, he has also been a member of the advisory board of Lendoe, an online lender focused on supporting Black, ethnic minority and early-stage entrepreneurs. Last year, he began mentoring for the Aleto Foundation, helping under-25s with their career development.
…And the deal
The sale of Unique Employment Services, a Luton-based blue-collar recruitment business, to Spanish firm Jobandtalent SL. Olagunju got to know the business in 2013 while working at RSM. He stayed close to the MD, Paul Hughes, and saw the company had to grow and diversify to hit Hughes’ desired outcome. When Olagunju joined PEM, he pulled together a recruitment sector round table at Cambridge University, including Hughes.
“We restarted our dialogue, then at the back end of 2019, he contacted me to say he’d had an approach and thought they may deliver the number. Could I provide negotiation support?” Diligence went smoothly, then COVID-19 struck. “Paul was concerned about being a going concern as opposed to the sale. So we took a few months, let the sediment settle, then he picked up the phone to tell me trading hadn’t softened and was going well.” Olagunju brought his recruitment sector expertise to support final negotiations, with the sale finally completing in September 2020.
