The Central South Private Equity Perspective

October 2020

With David Wrench, Investment Director, YFM Equity Partners, and Steve Hoon, Tax Partner, BDO.

The coronavirus pandemic has drastically altered many aspects of life and business across the UK. But when it comes to investment decisions, “there’s a lot, thankfully, that for us has remained unchanged,” says YFM Equity Partners investment director David Wrench.  

The firm’s four UK investment offices already had agile working practices in place, so adapting to a life of regular video calls instead of in-person meetings has not been a problem. 

In terms of investments, YFM has naturally been taking the impact of coronavirus into account, “not just on businesses directly, but also supply chain, end customer demand and channels to market,” says Wrench. 

And lockdown has given the YFM team time to reflect on which sectors offer the best opportunities post-COVID. But “what it feels like for us is very similar,” he says. “There’s just a slight shift in emphasis in areas of focus.”

One of the reasons why private equity backed businesses may be quite resilient in the new reality is that they have always been very focused on cash, says BDO Tax Partner Steve Hoon. This has allowed them to be well placed to access any funding required and focus on the COVID reliefs introduced. 

Throughout the coronavirus emergency, these businesses have “in a way, just continued to do what they’ve always done, but with perhaps a bit more focus,” he says. “Cash is more critical.”

The implementation of relief measures and changes in valuations means now is an excellent time for private equity-backed businesses to be looking at incentive plans, says Hoon. “Over time, we might see some restructurings which have tax complexities,” he adds.  

Wrench reports that deal flow at YFM has been affected by coronavirus, but perhaps not as much as you might expect. 

The company invests in two types of opportunities: earlier-stage small-to-medium enterprises (SMEs), with a turnover of around £1m upwards, and more established businesses, with a profit of around £1m upwards. The first group paused slightly under lockdown but appears to have bounced back. 

Among more established companies, meanwhile, the decrease in deal flow has been more pronounced. But “we’ve seen a definite uptick in deal flow post the summer,” Wrench notes. 

“There’s obviously wider macro drivers, like Brexit and mooted changes to the capital gains tax structure,” he comments. “All of these, in combination with COVID and lockdown, have been a catalyst for some business owners to start considering their options.”

YFM expects this strong deal flow to be sustained until the end of the year, when the impact of Brexit could add uncertainty to the outlook. Also uncertain is the impact of possible changes to capital gains tax rates. At the moment, such changes are “pure speculation,” Hoon points out. 

“Ultimately nobody knows what will happen,” he says. “If you look back over time, capital gains tax rates are at low levels so it’s hard to see rates going down. You would think they would stay relatively stable or they could of course be increased.”

Under such circumstances, capital gains thinking very much depends on the situation each management team finds itself in. Hoon offers the example of a large business that is starting to consider an exit but is unlikely to complete the process in the short or medium term. 

“It’s unlikely to be feasible for the timeline of that type of deal to take into account that capital gains tax rates could be subject to change,” he says. 

Alternatively, companies and individuals that have flexibility to move sooner may feel now is a good time to explore transactions. 

“Where we are talking to minority shareholders and there are bigger commercial drivers influencing the next commercial transaction, then ultimately there’s not a great deal that can be done,” Hoon concludes. 

“But if it’s individuals that are more in control of that process, there’s so much they could be doing now to protect themselves by arranging their affairs based on the current capital gains and inheritance tax laws. There would be merit in those sorts of businesses or individuals talking to a tax adviser.”

Potential changes to tax laws can also factor into group reorganisations and would also make it sensible to consult tax experts, Hoon says. 

With all this, the fundamentals of what private equity investors look for in companies have not changed that much, says Wrench. 

“We’re probably thinking slightly differently about certain sectors but in terms of overall characteristics they are going to be the same as before: growing businesses looking to do something interesting over the next few years,” he says. 

“Those management teams that have been able to ride the storm and deliver robust performance throughout the last six to eight months have a perfect track record to deliver value in the future.”

BDO has a dedicated PE team based in its Southampton office that work with PE backed businesses week in and week out. In addition to Steve Hoon you can contact any of the following audit director, James Newman; transaction services director, Darren Phillips or M&A specialists partner Helen O’Kane and director Ben Knowles.


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