SMEs on the radars of cashed-up private equity firms, but uncertainty weighs on M&A activity: Report

The economic uncertainty is unlikely to dissipate anytime soon, but an increased appetite for acquisitions from private equity and the narrowing gap between vendor and buyer expectations augers well for small- and medium-sized enterprises, the accounting firm Ernst & Young says.

Graeme Browning, Ernst & Young Oceanic managing partner transaction advisory services, says cashed-up private equity firms are prowling around SMEs once more.

“One of the interesting things we’ve seen over the past years is the re-emergence of private equity. The banks seem to be happy to support private equity buyers again and I think it’s something that SMEs will have on their radar,” Browning says.

“The reason you want to get them on board is to access capital to grow. If you’re in that camp, now is quite a good time.”

Browning says recent private equity investments in the automotive after-market parts groups Repco and Burson Auto Parts, as well as the 50% sale of fruit and vegetable giant Costa Group, are examples of a “good matching of what the PE player is looking for and what the SME is offering” – that is, “good businesses with a strong market position where the buyer is able to see medium- to long-term growth opportunities.”

He adds that the narrowing gap between vendor and buyer expectations presents opportunities for SMEs looking for growth or an exit.

“When the GFC first hit, many sellers had an unrealistically high expectation of value; they hadn’t adjusted down their expectations and companies didn’t have the capacity to pay, so that was one of the inhibitors of transaction activity.”

“To see that turning around is a promising sign, especially when so many companies are very well capitalised and have very low levels of gearing.”

Tipping continued economic uncertainty overseas and continued constraints on SMEs’ access to capital, Browning says SMEs will need to be well-prepared to meet the high hurdles set for them to fund growth independently.

Still, Browning says the future is “very bright for SMEs from a transaction perspective, and generally a growth perspective.”

“The only question I would pose is, like anyone, they need to think about how they are going to access that funding in a somewhat volatile period.”

Browning’s comments come as Ernst & Young’s global survey of senior executives at medium to large companies found 63% of Australasian respondents expect prices paid for businesses to remain stable and 19% expect them to increase.

The company’s global capital confidence barometer, a twice-yearly survey of executives across 51 countries, also found that 25% of Australasian corporates are planning to divest over the next 12 months, a post-GFC peak.

The survey, which includes 110 respondents from Australia, revealed that the number of Australasian corporates planning to pursue acquisitions, however, fell five percentage points to 41%, in line with global M&A expectations.

“Australasian companies are shifting their focus from investing and optimising, to preserving unusually high levels capital,” the survey said.

“We believe Australasia’s conservative corporate nature, although arguably helpful during the post-GFC recovery, may now be fostering pessimism among local executives,” the report said.

“All the indicators point to an improving M&A environment, and the corporate reporting season was generally in line with or above expectations. Uncertain times can present tremendous opportunities, particularly for those who are most rigorous in evaluating risk and astute at assessing investment opportunities.”

“Companies now have both the means and opportunity to pursue M&A. There is every reason for transactions to return to normal levels.”