UK Technology Firms Face Liquidity Crunch, Says Grant Thornton
Report
A large number of private equity investors in
the UK Information and Communication Technologies (ICT) sector are
facing a liquidity crunch says a report by leading finance and
business advisors, Grant Thornton UK LLP.
According to the firm's report 'Where is the
Smart Money Going in ICT', a survey of 40 leading private equity
investors backing UK ICT firms, shows over 80% of the firms wishing
to make an investment in the sector in the next year but the
continuing shortage of debt finance is still expected to be a very
significant obstacle over the next twelve months . 75% of
respondents remark that the current debt financing environment
continues to act as an obstacle to deal activity, while 68% cite
the price dislocation between buy and sell-side parties as the most
significant obstacle. Less respondents state competition from cash
rich corporate acquirers (35%) and a preoccupation with preserving
value in existing portfolio investments (28%) to be significant
obstacles to private equity investment over the next twelve
months.
As would be expected 80% believed a reduction
in debt-to-equity ratios has been the most significant change in
deal structures in the last year but 54% also remarked upon the
increase in minority stake investments as investors seek to spread
risk.
In line with the findings above, the survey
shows that smaller ICT firms in particular are finding it difficult
to secure finance as investors avoid start-up level firms with
speculative growth, indeed 33% of survey respondents stated that
they have become increasingly selective when looking to invest,
favouring companies with robust revenues streams and eschewing
riskier investments Overall deal sizes have gone down with
53% of deals in the sector last year in the £15-£100m range with
33% in the <£15m range
Niki Dixon, Technology Partner at Grant
Thronton said: "There are several steps ITC companies can take to
be seen as an attractive investment opportunity by potential
investors. They must enter the market with realism about multiples,
deal structures and timetables and the supporting story about their
growth potential must be robustly defended. There must also be
enough resource within the business to cope with the demands of the
process to give the investor confidence that management can deliver
the transaction. If management are well prepared in all these areas
this will help relationships with investors and ease nerves about
making the investment".
The reluctance of investors to back start-ups
does mean that they are ripe as acquisition targets but only if the
purchaser can see a clear value add. 34% of respondents note
an increase in volume of 'buy and build' strategies as one of
the key ways that private equity deals in the UK ICT sector have
changed since the onset of the financial crisis.
When looking ahead to future investment
activity, respondents were positive about the level of private
equity investment the UK ICT sector will enjoy over the next year.
84% of respondents plan to undertake an acquisition in the sector
in the next twelve months. However, there were notable reservations
based on the considerable challenges, such as those above, that ICT
firms face when undertaking transactions.
(ICT) firms which experienced the downturn in
the sector in 2001 are now better placed to weather current market
conditions 64% of respondents in the report agreed that the sector
is more insulated from the current downturn due to the
lessons learnt from the dot.com crash of 2001.
Niki Dixon, Technology Partner at Grant
Thornton said: "With access to capital at a premium compared to the
recent past those looking to invest in the ICT sector are
applying a much tougher set of criteria to identify attractive
investment opportunities than they did before the economic crisis.
Far more attention is being paid to historic performance as opposed
to simply focussing on the growth potential."
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For further information please
contact:
Nicola Daley, Grant Thornton press office on
020 782244 or Nicola.daley@gtuk.com