Debt for deals outlook

The Corporate Finance Faculty hosted a webinar on what the future holds for debt markets and how that will affect M&A deal flow and structure.

The webinar was chaired by ICAEW head of corporate finance, David Petrie. Jackie Bowie, managing partner and head of EMEA at Chatham Financial, set out the economic backdrop and the impact on debt markets, before the hot topic was discussed by the panellists: Fenton Burgin, Deloitte’s head of UK M&A debt and capital advisory, US/Europe M&A corridor; Chris Lowe, EY capital and debt advisory partner; Kate Beckingham, investment director at August Equity; and Alastair Jemmett, senior director in acquisition finance at Virgin Money.

Burgin said: “The UK economy is in perhaps a better position than was predicted six to nine months ago. Corporate plc is in a strong position. UK plcs have record cash balances, with many companies having taken the opportunity of ultra low rates to refinance in 2020 and 2021. With quantitative easing having been wound back, we are seeing interest rates normalise towards long-term trends.”

He said the positives were that corporate M&A seems to be coming back, and mid-market deals in the £50-500m range seem fairly strong.

He warned that interest rates very much depended on how quickly the inflation outlook improved.

Beckingham, meanwhile, said that August Equity had hedged its debts last autumn, not having had to worry about interest on portfolio companies for the past five years. 

If interest rates remain higher for longer to combat high inflation, Lowe warned that before interest rates could be reduced central banks would seek to protect currency, and so he saw a different weighted cost of capital and investment atmosphere in the market: “All this flows through to valuation resets – we have to live with a higher cost of capital.”

Burgin said that sellers’ price expectations didn’t yet factor in changed valuations, based on the levels of debt buyers can put into deals and “until that gap narrows you are likely to see slightly subdued deal activity”.

Beckingham added that she didn’t see pricing going up in the near term to where it was 18 months ago, off the back of COVID-19, when the market was so hot and frothy and it was extremely expensive to buy good assets. She said, however, that debt was still available, albeit with the bar to access it being slightly higher.

“We are seeing that the debt markets are still open,” Jemmett explained. “There is a wall of money and unspent dry powder.” PE raised $1.24trn globally, and debt funds $146bn, he said, which will be deployed over next three to four years. 

He added that Virgin Money has been providing “super senior” debt to deals, which ranks above senior debt and debt funds in an insolvency. This reduces the overall cost of borrowing.

He explained: “We have recently been completing transactions with debt funds that can reduce the overall blended cost of capital.”

New faculty manager

Raquel Edward has joined the executive team of the Corporate Finance Faculty as manager. Originally from South Africa, she qualified as a chartered accountant with PwC in Johannesburg. She moved into transaction services and, after two years, transferred to PwC’s London office. She spent eight years in transaction services, becoming senior manager, before changing direction to become a career coach to experienced professionals completing their masters in finance qualification at the London Business School.

“I have a real understanding of the world of corporate finance, having spent more than 10 years working in transaction services and on due diligence assignments, and thereafter with masters students pursuing a career in M&A,” says Edward. 

“I’m looking forward to meeting members of the faculty to get a better understanding of their needs from our network. We have a broad range of member firms, and so getting to know what they do around transactions will be great learning for me, as I work with the rest of the team to deliver the services expected from the faculty.”

Innovation in Liverpool

The Corporate Finance Faculty took part in the second Liverpool City Region Innovation Investment Summit, in May. ICAEW’s head of corporate finance, David Petrie, chaired a panel discussion on getting businesses from start-up to growth, and the need to attract more private equity and venture capital to the area.

He said: “ICAEW is delighted to deliver this important investment summit, which for the second year has succeeded in bringing together the investment and business communities. It is very pleasing to see that some of the initiatives agreed at the inaugural event 12 months ago are now in place and delivering clear benefits, including advice and funding, to fast-growing, innovative businesses in the Liverpool City Region (LCR).”

The mayor of the LCR, Steve Rotheram, opened the 2023 event, which was held at The Spine in Liverpool’s Knowledge Quarter, and said that the past year had been a “complete game changer for the region”. He highlighted consecutive successes, including the ground-breaking strategic partnership with Innovate UK; the Baltic Ventures accelerator programme; the launch of the city region’s new fleet of publicly owned hydrogen buses and £500m investment into its trains; the potential for the world’s largest tidal power scheme in Mersey Tidal Power; the opening of the LCR’s Freeport – and the knockout success of hosting the Eurovision Song Contest on behalf of Ukraine.

The summit, delivered by ICAEW North West Region, is a landmark innovation investment conference for stakeholders, business leaders and policy experts. This year welcomed guest speakers and panellists from BioGrad, ORCHA, Sci-Tech Daresbury, Northern Gritstone, and more.

Net-zero ambition

Rotheram launched the refreshed LCR Innovation Prospectus that reaffirms the city region’s ambition to invest 5% of GVA in R&D annually by 2030, a target that is nearly double that of the national target, while aiming to become net zero by 2040 – a full 10 years ahead of the UK’s goal.

The Innovation Prospectus outlines the region’s plans to add an estimated £42bn to the city region’s economy, create 44,000 jobs and generate a 10% boost to productivity.

Rotheram said: “From the moment I was elected mayor, it’s been one of my priorities to cement our area’s reputation as an attractive environment for businesses to innovate and invest.

“I’m incredibly proud of what we’ve already achieved – but I want us to go further and catapult our region to the forefront of UK science and innovation.

“Our Innovation Prospectus showcases the full breadth and depth of our ambitions and demonstrates the unique place-based approach that continues to make our area one of the most lucrative locations to invest in.”

Lorna Green, CEO of LYVA Labs, said: “LCR has ambitious targets for R&D-linked innovation growth in the next 10 years, linked to a growing cluster of science, innovation, and industrial assets of national and global importance. 

“LYVA Labs aims to harness these regional assets by fostering collaborations, developing investment opportunities and mentoring innovation talent, to extend real growth opportunities to SMEs and innovative businesses across the region.”

Global outlook

When looking at the global picture, panellist Shaun Beaney, editor of Preqin First Close – who helped organise the inaugural event last year while a manager at the Corporate Finance Faculty – said venture capital funds worldwide had $2.5trn of assets under management, including $564bn of ‘dry powder’. “If LCR attracted only a tiny increment of that, it would be transformative. The region is building on its strengths in life sciences, materials chemistry, AI, and net zero, all of which are potentially of great interest to early-stage investors.”

The event was backed and supported by the LCR Combined Authority, Innovate UK, the British Business Bank, LCR Connect, Preqin First Close, LYVA Labs and the Liverpool Chamber of Commerce.

Chair Steve Stuart, local corporate financier and chair of the Liverpool City Region LEP Professional and Business Services Board, noted: “This summit really demonstrates the progress the region is making. Innovation is the key to economic growth and success over the next seven years. It is really amazing to see so many significant projects coming together across the city region. This environment provides SMEs with a real opportunity to get on the growth journey and flourish over the next few years.”

Alex Pilkington, regional executive (Merseyside and Cheshire) at ICAEW, confirmed that the summit would return to Liverpool on 23 May 2024, to continue driving the innovation agenda in the region. For further details and sponsorship information please contact alex.pilkington@icaew.com