International outlook makes Irish firms attractive to UK and US funds

Deloitte is one of the largest players in the M&A sector in Ireland, doing the majority of deals in 2021 and 2022. From its viewpoint, most overseas interest hails from the United States and the UK.

“Ireland has a large number of SMEs active in this market and while they might be smaller in size than other parties, given the isolated nature of our country they tend to have a very international outlook already,” says Jan Fitzell, partner in corporate finance at Deloitte.

The activity in the marketplace is also driven by a strong domestic private equity market. This is supported in part by local firms but also increasingly international companies opening up Irish offices which demonstrates the level of interest in Ireland both from an overseas and domestic perspective.

Last year UK funds took a greater interest in Ireland, generally because of the slowdown in the British market and contrasting growth domestically.

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“We saw an acceleration of interest as opposed to a deceleration,” says Fitzell, something she ascribes to a “level of uncertainty which makes investing in the UK quite tricky”.

“With the UK funds, we find that once they make their first investment you can expect them to invest again as they are more comfortable with the market, the economy and the people,” says Anya Cummins, also a partner in Deloitte.

The feedback we get from overseas PE firms is that they like the Irish market as founders are smart, well-educated and are often willing to move overseas to help grow the business

—  Alan Kelly, Focus Capital

“We’ve seen as a safe haven for money. And most of that volume of deals in the Irish market are in the mid-market. That’s the bread and butter of the Irish market and that part of the market has been less impacted by the availability of debt,” she says.

The current economic challenges, including the cost-of-living crisis, wage inflation and energy inflation, are impacting on margins and reducing performance growth in some sectors. However, resilient sectors are still enjoying investment. Those less impacted by these macro-economic challenges include business services, financial services, technology, healthcare, and life sciences.

Alan Kelly, managing director of Focus Capital, says online meetings have also been a major driver in bringing in overseas private equity (PE) firms.

Focus Capital has completed several transactions with overseas PE firms in the past three years.

“The move to online meetings has propelled their presence and helped them to increase their reach. It’s much easier and cost effective for a PE firm to schedule five to six Zoom calls a week with Irish targets rather than travelling and trying to arrange business development meetings with busy founders,” says Kelly.

“Our US affiliate firm Focus International has introduced us to some specialist PE firms that invest in sectors such as renewables, engineering services, IT managed services and manufacturing. From initial discussions and meetings with these specialist firms we believe that they expect to be busy in the Irish market.”

Being unable to find value in domestic markets also increased the UK’s attention on Ireland, says Kelly.

A competitive landscape

“UK PE firms became very interested in fast-growing Irish software companies in late 2020 and early 2021 as they were seeking value they could not obtain in their own markets. This created a very competitive landscape. They have remained interested in the market and have expanded their interest into multiple sectors – tech-enabled businesses, IT services, financial services etc.

“The feedback we get from overseas PE firms is that they like the Irish market as founders are smart, well-educated and are often willing to move overseas to help grow the business,” says Kelly.

There is also a trend for private equity funds, both domestic and international, to use their portfolio assets to make other acquisitions. The insurance sector is experiencing such interest.

In manufacturing, Mergon’s acquisition of Weltonhurst is an example of a portfolio company of a PE fund (Elysian Capital) making an acquisition and the PE fund deploying additional capital through its portfolio companies.

“This trend will continue to grow as, from a private equity perspective, it’s an easy way to deploy capital. They know the team, they’re comfortable with the sector and they’ve done the hard work, if you will,” says Fitzell.

Gavin O’Flaherty, partner in the corporate team at Eversheds Sutherland, Ireland’s largest global law firm, sees the interest of overseas PE funds as being based on a myriad of reasons including Ireland being the only English-speaking nation in the Eurozone, Irish expertise in certain sectors such as agri-food, the quality of the entrepreneurs and companies, a common-law framework, and a business-friendly environment.

He points to high-profile entrants being active here, including entities such as Cerberus and others that bought during the financial crisis, as well as UK and European PE houses such as Highland Capital, Synova, Livingbridge, CBPE and Sovereign Capital that have grown (and exited, in certain cases) successful Irish companies. Finally, like Deloitte, O’Flaherty points to the opening of physical offices in Dublin, as in the case of Elysian Capital.

“All of these investors have certainly created severe competition in certain sectors, which is still being felt, with price pressures in sectors such as the insurance brokerage and wider financial services sectors. PE houses and their portfolio companies are vibrant players in several markets but they are being matched by trade buyers in certain cases,” says O’Flaherty.

“They have, arguably, influenced the market with price expectations but they have also brought expectations to the market for sellers who are now expected to come to market ‘ready to sell’, with vendor due diligence reports already in place in certain cases and a growing usage of warranty and indemnity insurance to mitigate risk.”

Private equity versus venture capital

There has also been strong interest from US private equity and venture capital houses. For example, HarbourVest bought into assets including the Mater Hospital, while Insight and Summit Partners have backed successful emerging Irish companies.

Typically interest from the US focuses on slightly larger businesses. Again, the fact that Irish businesses tend to be internationally focused accelerates interest.

Cummins describes the difference between private equity deals and venture capital (VC) deals.

“Preparing for a private equity process is more of a partnership model,” says Cummins. “That means the management team or business owners must be super clear on what that growth journey is and what the upside might be in three years’ time. So, preparation is key.”

VC tends to be more early stage and also weighted towards the technology sector.

“You will often see several venture capitalists coming together on a transaction, whereas private equity tends to be a single fund. But the same concept applies to finding the right one source of capital, preparing for the process and being super clear on what you’re looking for,” says Cummins.

“The management team need to take advice on both financial and legal to make sure that the deal is being structured in a way that’s appropriate and protecting the underlying rights of the shareholders but also maximising their return.”

Kelly also points to indicators that overseas funds will continue to have a strong presence in the Irish market.

The sweet spot for bolt-ons

“Many have already invested in platform businesses and are seeking bolt-on acquisitions for those platforms,” he says.

“Irish companies are often in the sweet spot size-wise for bolt-on investments. PE firms are still sitting on huge amounts of capital that they need to deploy. We would expect activity to remain strong. However, extensive diligence will form part of the process in a more risk-averse environment,” says Kelly.

Sarah Bogossion, corporate finance director at Goodbody, feels that PE and VC deal volumes in 2023 are unlikely to return to the 2021 highs, given that the number of deals was significantly lower in 2022, although she recognises that there are always exceptions for high-growth companies.

“However, PE and VC investment appetite also varies greatly by fund, depending on level of capital available for deployment, the health of current portfolio companies and what level of investment is targeted for the coming year,” Bogossion says.

“The cliché of there being lots of dry powder remains true. However, investors are being more cautious and doing more diligence - which generally means deals are taking longer to close.”