Rising to the challenge in the West Midlands

Welcome to the West Midlands, home of the minority stake. Not the catchiest of slogans, but one befitting a more circumspect world rather than just a region where the ambitions of private equity dealmakers are a little more modest than they used to be. In more bullish times, the leveraged buy-out tends to be front and centre. Today, concern around the sustainability of current valuations, combined with a relative lack of choice when it comes to debt finance, is making the buy-out deal something of a rarity. Minority deals are taking up the slack, and it certainly seems to be the case in the Midlands. 

“It might be a bad time to exit due to market factors that don’t reflect the fundamentals of the business or opportunity,” says Seb Saywood, an investor at BGF, which has a network of 15 offices including one in Birmingham and is a long-term minority investor. “If you take investment from an equity partner at this stage of the cycle, there should be opportunities to maximise a future exit when the world is a different place.”

Saywood and other local deal professionals report that last year was very busy for West Midlands deals, in traditional sectors such as automotive and industrials as well as today’s more ‘hyped’ areas such as technology and healthcare. But activity slowed following the disastrous ‘mini budget’ in September and hasn’t really picked up since. 

The tech take-up

‘Resilience’ is a word used often in these times of economic stress: it’s a quality that investors are on the hunt for. In the West Midlands, technology is the sector many are pinning their hopes on to see the region through the tough times. A recent report by the UK government’s Department of Digital, Culture, Media and Sport said the West Midlands had the country’s fastest growing tech sector and predicted it would generate at least £2.7bn for the local economy by 2025. 

“There’s a thriving tech community out there that’s scaling at some speed and there’s therefore an opportunity for investors like us to help drive and amplify that growth,” says Chris Handy, a partner and head of the West Midlands team at private equity firm LDC.

Darren Boocock, a corporate finance advisory partner and head of the Midlands at Deloitte, adds: “For businesses that have been through a couple of rounds of early-stage/seed capital and are now looking for institutional-type capital, there’s traditionally been plenty of appetite for that kind of funding. There has been a drying up of that type of finance lately, but we think it’s temporary as the appetite for these types of business is still there.” 

Boocock says healthcare technology is a popular area but so too is food tech, including businesses developing bioponic growth methodologies (growing without soil using environmentally friendly fertilisers). Another area seeing strong activity is challenger broadband providers that are keen to take on established industry giants such as BT Openreach and Virgin Media. 

Heart of the matter

Birmingham’s thriving financial community includes private equity firms, corporate finance boutiques, debt advisers, lenders and corporate lawyers. Those in the region say that, outside London, only Manchester can make a reasonable claim to have a better financial infrastructure in the UK. Many deals can be done entirely within the region. 

“Long gone are the days when, if someone wanted to sell their business in the West Midlands, they had to traipse down to London to hire a corporate finance adviser who would then put them in touch with a London-based private equity firm,” says Andrew Ferguson, a partner at private equity investor Maven Capital Partners. “That hasn’t had to happen for a long time.”

Certainly, there’s a strong community of private equity firms either focused on the West Midlands or with activities around the UK of which the region forms a part. Few would pretend the first half of 2023 has been anything other than challenging, in large part because debt finance to support deals has become harder to obtain and/or more expensive. When it comes to the second half of this year, however, there is more optimism. 

“I think H2 will be quite different, providing the debt markets unlock,” says Saywood. “Even in a flat market there are winners who want to do something, such as taking on a minority investment to acquire competitors. They’re ambitious and they want to grow. That activity always exists, it’s just that there’s been of a bit of a slowdown relative to trade deals for a short period.”

Banking on debt funds

The debt market unlocking Saywood refers to is being aided by more debt funds emerging to take up the slack while banks pull in their horns. “The banks were very supportive through the Coronavirus Business Interruption Loan Scheme (CBILS) during the pandemic,” says Ferguson, “but when you look at how they’ve increased the size of their balance sheets as a result of that support you can see why they probably want to be a little more defensive in the current environment.”

He adds that the debt funds – mostly London-based – have become more prevalent. However, given that the cost of their finance is typically higher than the banks, they won’t necessarily be affordable for everyone. “Debt is more expensive than it’s been for the past 10 years or so and that’s bound to have an effect on the ability to structure and fund deals,” says Deloitte’s Boocock. 

He sees the market as subdued rather than lifeless and points out that there is still a large amount of private equity waiting to be invested. While he doesn’t see a return to the M&A boom period of 2021/22, he speculates that an election – probably next year – could be a catalyst for some private businesses to sell, given the volatility that might arise from a change of political control. “There may be a short-term boost ahead of a UK general election that could take deals up to the levels we saw previously,” he says. But with experts predicting a ‘higher for longer’ interest rate environment, no one is predicting a swift return to boom times.