A Special Report is content that is edited and produced by the Special Reports unit within The Irish Times Content Studio. It is supported by advertisers who may contribute to the report, but who do not have editorial control.

Bumper year for mergers and acquisitions despite pandemic

BDO executive expects number of private equity firms in Ireland to grow over next two years

‘It has been a great 12 months for M&A activity.’ Photograph: Getty Images

‘It has been a great 12 months for M&A activity.’ Photograph: Getty Images

 

It has been a very good year for mergers and acquisitions, with deal volumes hitting record highs. Much of the activity has been driven by private equity whose value, according to law firm William Fry, jumped 477 per cent year on year.

Having arrived on these shores only a decade ago, it’s a form of funding that is now making its presence felt, particularly at mid-market level. Take Sonas, a Ballycoolin-based supplier of bathroom products. It was set up in 1978 by John Usher, who subsequently gave the reins to his son, Dermot.

In 2016, MML Growth Capital Partners Ireland took a stake in Sonas which, at the time, had revenues of €24 million. By last month, when the company was bought out by its management team, annual sales had almost doubled, to €45 million.

For the MBO team, managing director Richard Sloan, finance director Darren Tierney and commercial director Ger Fahy, the acquisition marked the start of a new era for the business, which employs 90 people.

The management team was backed by US private debt firm Muzinich & Co but the experience of working alongside a private equity house was a good one for all concerned.

“There was a great dynamic between MML and the management team,” says Richard Sloan. “I had no experience of private equity but we found them excellent. It gets you out of your comfort zone. They were really supportive of management ambitions. We had a big move, for example, which they supported, and we developed a brand, which they supported too. They had a positive experience with us too, so it’s been a win-win for everybody, including the staff, who are delighted to have the management team that they know and trust take ownership of the business.”

Good story

“Founders who have built up a business and see all their net worth tied up in it, are now selling a portion to private equity, as a way of cashing in some chips now, preparing for a full exit three or four years later and bringing new expertise around the table. That has been a really good story for them,” says David O’Kelly, partner, corporate finance, KPMG in Ireland.

“Around the time of the financial crisis, private equity was almost a bad word, like vulture funds. Now people have seen that it operates on a partnership basis, allowing owners to sell a portion now, go for a full exit in three or four years, and along the way maybe expand or make an acquisition of their own.”

It has liberated founders to take a chance they might not otherwise be inclined to take.

“If all your family wealth is tied up in the business, it can lead to risk aversion, to the point that, whenever a new opportunity for growth emerges, they ask themselves, do I really need to do this, and maybe risk everything I’ve built up here?” says O’Kelly.

“But being able to take some money off the table does help, as does having someone come in with a growth agenda, applying a different perspective.”

Covid-19 saw many prospective deals press pause in the first six months of 2020, creating the pent-up demand of the past 12 months, he says. And while sectors such as hospitality were hit hard, others, such as technology, financial services and healthcare, have done well.

Negative interest rates are encouraging some to go on the acquisition trail simply in search of a return for their cash.

While mega-deals make the headlines, much of the M&A frenzy of the past 12 months has taken place at mid-market level.

There have been challenges. “M&A, especially at mid-market level, is all about building confidence, trust and relationships. It’s hard to build that in a remote setting,” says Katharine Byrne, head of BDO’s corporate finance team and a member of the BDO International MN&A Group.

“On the other hand, the upside of the remote environment is that we’ve a lot more international buyers in the market now and no longer need the nitty gritty of trying to co-ordinate flights. Now we can all just hop on a call.”

The fact that private equity funds operate to strict timelines is also contributing to the currently high transaction rates. Many have been exiting and going back for more.

The amount of private equity in the market has also simply grown. There is now three times as much of it globally than there was a decade ago.

“It’s unprecedented. There is currently $3 trillion in private equity funds globally looking for a home,” says Byrne.

It typically divides into early stage venture capital, growth capital, and late-stage funding, which tends to be more international.

“In Ireland, we are now seeing late-stage PE (private equity) funding coming into the market much more aggressively than previously, including from the US and Canada which previously would have considered Ireland too small. Now they see that, especially with technology, they can take these companies to a much larger platform globally,” she says.

Technology and financial services, particularly insurance, are extremely active. PE likes sectors which are not exposed to economic cycles too, she points out, such as education and health, particularly where a company has an edtech or healthtech innovation.

Valuations are high and, for an SME, PE can be a cleaner route than selling to a trade competitor, which brings competitive risks. “Also, trade buyers look for synergies. If an owner is protective of their management team they may not want to expose them to the risk of redundancies,” she adds.

Niche businesses

There are currently about 25 local and international PE firms active here, a number which she predicts will grow through 2022, including spin-outs from earlier funds, which tend to invest in more niche businesses. 

“It has been a great 12 months for M&A activity,” says Andreas McConnell, the partner at law firm Philip Lee who leads the firm’s foreign direct investment practice.

“When the pandemic first hit people were worried about economic shock, similar to the last crisis. After that initial fear and trepidation, it opened the way to activity, helped by the fact that there was a lot of money in the market, particularly private equity money,” says McConnell.

He was part of the legal team working close to the sale of renewable energy company Mainstream to Norwegian firm Aker Horizons.

The deal valued Mainstream at more than €1 billion and was achieved without any in-person meetings at all. Realisation that deals could be done while everyone was working from home helped drive on activity too, he points out.

Brexit played a part too, even if many Brexit consequences are currently blamed on the pandemic.

He points to McDonald’s reported difficulties with milk shakes as a case in point. “It has one of the most sophisticated supply chains on the planet,” says McConnell, who believes Brexit is the real issue. It is also driving many UK companies to come here to establish a firm foothold in the EU.

There are some new enablers driving M&A activity too, he points out. Legal warrantees and indemnities, previously the domain of large transactions, are now being written at mid-market sector too, bringing comfort to vendors considering a sale.

“Warrantees and indemnities, which last up to two years, are something that give vendors a lot of worries post-completion,” says McConnell. “But if they can close the deal and know that any such claim is insured, that gives them a much greater sense of freedom to sell.”