Richard Swann, partner at Inflexion, a mid-market private equity firm, explains why corporates with large cash holdings are not a threat to private equity firms in the M&A market and how companies can capitalise from the post-pandemic rebound
The uncertainty caused by the pandemic left many private equity (PE) firms to exercise caution. However, for Inflexion, a mid-market PE firm, the crisis provided the perfect opportunity to focus on its portfolio..
Financial Director spoke with Richard Swann, a partner and member of Inflexion’s executive and investment committees who leads the firm’s Buyout Fund, to discuss the benefits of priotising its portfolio companies during the crisis, competing with corporates in the M&A market and identifying where the biggest growth opportunities lie.
How has the pandemic influenced the relationship Inflexion has with its portfolio companies?
We’ve always been very close to the teams we invest in – it’s a business partnership after all – but it’s possible the last 18 months have strengthened these relationships.
At the start of the pandemic, there was an extra burst of contact as we worked out what the lock-down would look like, what actions we needed to take and where opportunities might arise. Naturally most of this was remote, and while that can’t completely replace in-person get-togethers, the ease with which we all slipped into working online was extraordinary. I would say the frequency and timeliness of meeting has increased. Nobody now needs to wait for a board meeting to take key decisions.
Knowing how others have overcome challenges similar to your own is invaluable, especially when you can speak with them in an off-record platform. We ran a series of sector- and strategy-specific ‘exchanges’ using Teams or Zoom – roughly one a week; everything from ‘accessing government support’ to ‘keeping people engaged when working from home’.
Overall, I would say elements of remote working have enhanced our business materially.
How has the pandemic influenced how Inflexion deploys capital?
We did pause in the very early days of the pandemic – I think everybody did – and we prioritised our attention on the portfolio. This was absolutely the right thing to do as each business needed to assess its own situation and work quickly and thoughtfully to protect existing revenues and shore up any potential weak spots. Within weeks however we were turning our attention to where opportunities lay.
Some private equity firms took a step back, possibly because they were under-resourced or inexperienced, but we opted to base our decisions on the long-term prospects for the businesses and look through the current issues. This meant we reinforced our market-leading position, underlined our reliability as a counterparty and kept providing capital for great businesses.
Many businesses are now focusing on growth as we emerge from the crisis, what do you think will be key to those strategies?
It is true that overall investment activity levels paused during Q2 and Q3 last year, but from Q4 onwards deal activity picked right back up. In a UK context Q1 2021 was stimulated by vendors’ concerns around changes in capital gains tax, and the pace hasn’t really stopped since.
At the moment, I would say most companies have turned from being demand constrained to supply constrained, and that is everything from supply chain issues to people recruitment. I would say the firms that will capitalise on the post pandemic rebound will be those that can deal best with these issues.
Over and above that, I would say consolidation is an inevitability in most markets, and those companies that have the access to capital to augment organic growth with acquisitive growth and cement market-leading positions will thrive.
Another area of great interest to growing companies is the international arena. The restrictions of lockdown meant that a local presence in important markets became more crucial than ever.
A final theme I would pick out is the acceleration of digitisation. The bigger prizes in our portfolio have come from changes to digital strategies that have enhanced customer experiences and tracked valuable data. Using these analytics can help companies to better evolve their offering and product pricing mix.
Corporate cash holdings grew significantly in 2020, which could see companies explore inorganic growth opportunities and compete with PE firms in the M&A market. How competitive is the M&A market right now?
Everybody knows that the market is very competitive, and valuations are high. Might they rise further as cash-rich corporates vie for deals? Possibly, but we are not building that into our own returns expectations. There is always uncertainty, some of it at a macro level, some much more localized, and the events of the last 18 months will still weigh on vendors’ minds.
In our experience, corporate acquirers are pretty disciplined when it comes to what they want to acquire, and price is usually a secondary consideration to the industrial logic of the acquisition. They are also usually slower to make decisions, and of course rarely offer the incentives to managers that private equity can. As a result, it is now commonplace for vendors of businesses to want to give their management teams “the chance to buy the business”, preserve the work force and of course often times keep a residual stake in the company and enjoy some further upside.
I would say that at the edges, sellers would now rather sell to private equity – reliable and speedy buyers of businesses.
What are the key political risks you face in the year ahead?
In the last few years, there has been a number of high-profile political events; Brexit and the UK General Election being the two most obvious.
In the short term, we are through that, but other issues will of course come to the forefront – Government needs to plot a tricky course that stimulates productivity and growth in jobs, deals with the public borrowing and keeps us on the right side of inflation. Not an easy task.
I do think private vendors will again begin to worry about rising corporate and personal taxes and I fully expect to see that stimulating deals as we head into 2022.
What do you think will be key for fellow financial directors in navigating the next 12 months?
One of the thankless tasks of Finance Directors (FD) is trying to predict the short-, medium- and longer-term future – put that into numbers for their colleagues and stakeholders, and help the business plan its resources for the year ahead. It is probably easier to do that today than at any time in the last 18 months – currency markets remain relatively stable and liquidity through the system is strong.
I think therefore the biggest challenge for most FDs will be working out what the supply side (operations) limitations in their business are, and how best to navigate them.
