The economic outlook for 2009 looks challenging to say the least. But the economic downturn also provides significant opportunities for investment. In this article DibbsBarker examines the current climate and discovers that a number of factors are contributing to the creation of opportunities in the SME space.
The general 2009 economic outlook is one of the most challenging for M&A and private equity for many years. The Australian Government and the RBA continue to work to ensure Australia is kept above recessionary waters, however the global economic climate and many domestic indicators are not promising for overall confidence. The National Australia Bank’s monthly business survey showed that business confidence fell to a record low of negative 32 points in January.
So far in 2009 the big M&A deals of recent times are struggling to take off. According to research house Dealogic, so far this year 99 deals totalling $US24.3 billion have collapsed globally including Lion Nathan’s bid for Coca-Cola. This follows a similarly difficult year in 2008, when 1380 deals worth a combined $US909 billion were withdrawn, rejected or simply lapsed including the BHP-Rio Tinto deal and Qantas’ merger with British Airways.
SME opportunities
History shows that from major economic downturns come significant opportunities for investors. As the dust begins to settle from 2008’s financial crisis, entities in the SME space have more reasons for cautious optimism in 2009 than their larger counterparts. We are seeing investment and acquisition opportunities continuing early in 2009 for SMEs and mid market private equity ($20 to $250 million) where there is a willingness to take on risk and brave market turbulence.
But why are there opportunities? A few key reasons:
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Declining asset values – The Australian stock market has lost nearly half of its value since November 2007 and asset values continue to decline across most industry sectors. But as the market comes closer to bottoming-out, investment targets will become increasingly attractive to cashed up investors and those having access to alternative debt sources.
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Debt stress – Debt laden corporates suffering reduced product demand and lower cash flow are having greater difficulty in managing their strained balance sheets. One solution - in this market - is the sale of assets albeit at bargain prices or discounted capital raisings.
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Vendor expectations – Over the last few years, acquisitive corporates have found opportunities at reasonable valuations hard to find. Over the second half of 2008 vendor expectations have dropped and are likely to continue to stay lower during 2009.
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Survival of the fittest – Corporates with stronger balance sheets will increasingly look to cement their market position not only through increased market share but growth through acquisition.
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$AUD – If the weaker Australian dollar continues, investment in Australia will continue to be attractive for foreign investors.
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Alternative investments needed – With interest rates at 1960s levels and superannuation suffering significant losses in 2008, investors are searching for alternative forms of investment offering higher rates of return.
SMEs are better placed
SMEs are often in a better position to take advantage of current opportunities. The SME business model and general deal sizes give these entities and funds the capability to respond now under current conditions and not at the end of 2009/2010. Whilst larger deals (with the exception of scrip offers) and top-end private equity cannot generally attract debt at acceptable rates of return for investors, SMEs generally rely on less debt and more cash.
Primarily we perceive distressed or troubled asset funds, mid market private equity, cash rich corporates (or those corporates prepared to consider scrip deals) and foreign investors (including sovereign funds) are those best placed to take action in the short term.
A number of distressed asset funds are actively marketing and raising funds that are attracting renewed investor interest. For example, Helmsman Capital recently raised funds to invest in restructuring, turn around and under-managed assets. These funds are now increasingly active across a number of industries.
We are also seeing increasing activity in mid market private equity with new funds such as Pinnacle Private Equity (Sydney) and Banksia Capital (Perth) going to market. Participants believe 2009 will be an excellent vintage for this sector of private equity as valuations become more attractive and businesses need to convert value into cash for personal reasons such as retirement. Unlike the bigger global private equity funds, high levels of debt are not necessary to achieve strong returns for investors.
But only time will tell how successfully SMEs are able to navigate the choppy waters of 2009 – but for those ready to venture into the market the opportunities, and rewards, are likely to be significant.
