It’s been a subdued period for M&A activity in the South West, but advisers can now see clouds clearing as a raft of new regional funding becomes available. Andy Thomson reports.
The traditional industries in Devon and Cornwall might have been facing challenges for a long time, but it’s all about technology in the South West now, say the region’s corporate finance professionals.
“Technology hasn’t been completely immune to the M&A slowdown, but it’s resisted some of the negative forces that have made doing deals harder because you have good underlying demand drivers, solid growth and visibility of revenues,” says John Levis, a corporate finance director at KPMG in Bristol.
Andrew Webber, partner and head of corporate at Bristol law firm TLT, agrees that the digital and technology sectors are thriving, with deals being done from small university spin-outs to large corporates. Financial services have also proved resilient, while the sectors of consumer, retail, food and drink, and hospitality have seen a deceleration aside from (surprise) firms with a tech angle.
Secret of life…
The success of companies such as anti-ageing firm Senisca and farm tech-based Prognostix are evidence of innovation in the South West – and who wouldn’t want the secret of eternal youth? Maybe it has already been found – in the arguably unlikely environs of Exeter.
Senisca, a spin-out from the University of Exeter, is developing new approaches to reverse the aesthetic and disease-causing aspects of cell ageing, with the aim of allowing people to live healthier lives for longer. In June 2022, the firm raised more than £2m from a consortium of venture investors, alongside £180,000 of grant funding from Innovate UK, the government’s national innovation agency. It will use the capital to progress its anti-ageing compounds to the next phase of laboratory testing.
Healthcare is one of the South West’s busiest sectors, according to Andrew Killick, a partner and head of the corporate finance team covering the southern region at PKF Francis Clark. “Examples include not only those that provide direct health benefit such as Express Diagnostics (recently acquired by Inuvi Group), but also ones that help the whole NHS system, such as Ultramed that makes planned operations more effective and helps to significantly reduce waiting times.”
And it’s not just human health. PKF helped Exeter vet Alan Beynon’s Prognostix Poultry raise finance to develop its technology before being sold for £12m to US-based Merck Animal Health in February 2021. Prognostix helps poultry farmers to continuously track and analyse the health and condition of their flocks and reduce reliance on medicines and antibiotics. Jonathan Stubbings at Grant Thornton advised Merck on the acquisition.
Killick says fast-growth businesses such as these can be found across the region – and not just in healthcare. He also cites Binit, another Exeter-based firm, which provides recycling services to businesses, and uses technology to reduce the impact of waste. And there is Staxy, another University of Exeter spin-out that started as a car-sharing app for students and is now being transformed into a commercial concern.
To help budding businesses launch and grow is an infrastructure that includes SETsquared, a business incubator created by the universities of Exeter, Bristol, Bath, Southampton, Surrey and Cardiff. There is also Falmouth Launchpad, an incubator/accelerator within Falmouth University that had created or helped 73 new businesses by May of this year, and Cornwall Space Cluster, a group of universities, businesses and industry experts working together to develop the space industry.
PKF has been busy with a range of transactions, says Killick, while accepting that the market as a whole has seen a downturn in deal completions. He says: “The quality of mandates has reduced compared with last year and vendors have yet to accept the impact of higher debt costs on valuations, and the return to equity investors.” However, he is expecting an uptick in activity in Q4, with many mandates poised to come to market in this month.
Wide area network
Defining the ‘South West’ is another matter – professionals on the ground say everyone you ask for a definition of the region will give a different answer. Bristol is the hub for advisory and investment professionals, but the South West is a wide-ranging area that covers anywhere from Gloucester on the northern boundary over to Swindon on the eastern flank, down to the coastal areas including parts of Dorset and, on the southwestern tip, Devon and Cornwall. Exeter and Bath are frequently cited as active deal hubs.
Spirit of invention
The South West has not been immune to the macroeconomic challenges, but John Levis of KPMG believes that companies in the region are on the whole proving their resilience. “It’s a very innovative region,” he says. “Significant investment has been made into R&D and invention, and we continue to see very exciting businesses growing strongly despite broader market conditions.”
While technology has bucked the trend, the shock of former Chancellor Kwasi Kwarteng’s ‘growth plan’ last year (however brief his tenure) has combined with the inflationary and high interest rate environment to make M&A a tough slog – not least because people now expect the unexpected. But, says Webber: “As this year’s gone on, there’s been more time to get used to what the new normal looks like. Things have stabilised and activity has been reasonably good.”
Melanie Goward, a partner covering the South West for private equity firm Maven Capital Partners, admits larger deals have been scarce amid rising debt finance costs and a growing gap between buyer and seller price expectations. But, she adds: “Small-cap transactions have bucked the trend and are seeing year-on-year growth in both volume and value.” She is now “cautiously optimistic” about the year ahead.
Levis says KPMG is expecting a busy fourth quarter this year, but it is clear that vendors remain thoughtful about the best time to launch a process. Some vendors are waiting for further growth to come through or contract wins to materialise before committing to a deal and, as always, thorough preparation is key. “It’s subject to people making the right call at the right time,” he says.
Kept in reserve
When those deals do come through, it will come as a relief to private equity firms sitting on large amounts of dry powder, but – anecdotally – with fewer opportunities to deploy capital than at any time since the quarter after the first COVID-19 outbreak in 2020. Because of the high cost of debt finance, corporate M&A is taking over centre stage from sponsor-backed deals.
One important development in the area that may help boost private equity and venture capital activity is the launch of the £200m South West Investment Fund (SWIF, see ‘New Money’, below). “Financing for both earlier stage and more established businesses in the South West has not always been readily accessible, and the fund will help resolve this funding gap,” says Goward of Maven, which manages a £38m chunk of the fund.
The picture for debt finance is similar to that for equity. After a period in which the banks have been risk averse and debt funds too expensive for some borrowers, the situation appears to be improving.
“There is debt availability out there for the right business and the right transaction,” says TLT’s Webber.
“The debt markets have been more difficult over the past 9-12 months, but we are starting to see some more activity – albeit at lower leverage levels and at higher interest rates,” adds KPMG’s Levis.
As activity begins to ramp up, the need for advisers and investors to network with each other is ever more important. In this respect, the South West, as an area that sprawls far and wide, is arguably helped by the hybrid working trend.
“On the one hand, there’s quite a lot more in-person networking than we’ve had for a few years,” says Webber. “But the benefits of hybrid working mean everybody can be connected to everybody else without the inconvenience of travel.”
Goward refers again to the SWIF fund as she gives a real-life example of South West networking in action. “The launch of the SWIF involved a successful series of well-attended events hosted in towns and cities right across the region, raising awareness of the new fund with advisers and businesses throughout the South West,” she says.
As the region adapts to the ‘new normal’ and starts to gear up for a busier M&A period as the year draws to a close, there should be more reasons for the region’s deal professionals to get together and share their experiences.
In early July, the British Business Bank launched the £200m South West Investment Fund (SWIF) to invest in small businesses in the South West. The bank wants advisers to connect local businesses to this new major source of funding.