SMEs shouldn’t ignore M&A deals, private equity: Ernst & Young

Whether it’s troubles in Europe, a potential slowdown in China, uncertainty about the Australian economy and rising business costs, there seems to be plenty of storm clouds for Australia’s small- and medium-sized enterprises.

But to paraphrase legendary investor Warren Buffett, there are always opportunities when people are stressing out.

Graeme Browning, Ernst & Young’s Oceania Transaction Advisory Services Leader, says it’s important that SMEs remember that winners – as well as losers – will emerge in 2012, and there are still interested buyers and investors out there.

“2012 will have its challenges and investors are going to be cautious. But I think the message is there will be winners and losers out of that environment,” Browning says.

“It’s times like these that do allow companies to break away from their competition.”

“For companies with a clear picture of where they want to go, 2012 could be an ideal opportunity for them to prudently make some of the challenges for the upturn.”

Browning says capital-stretched SMEs with a good growth story shouldn’t write off private equity, particularly as the initial public offering market is depressed and conservatism reigns among large listed companies.

“Private equity is one channel, and it’s absolutely worth thinking about,” he says.

“It won’t be for everyone, but private equity is cashed-up, banks are prepared to support private equity deals, and these guys are professional investors so they invest through all cycles.”

Private equity has had a mixed year. According to today’s Australian Financial Review, Archer Capital’s latest fund closed over-subscribed, raising up to $3.2 billion, and the group – alongside Ironbridge Capital – last moth sold iNova Pharmaceuticals to Canada’s Valeant for up to $700 million.

Other deals through 2011 have included:

• Lazard Australia Private Equity’s investment in sports apparel group 2XU.
• Australia’s number one fruit and vegetable group Costa Group selling a 50% stake to US private equity firm Paine & Partners.
• Pacific Equity Partners’ float of Collins Foods Group.
• Quadrant Private Equity’s sale of Quick Service Restaurant to Archer Capital.
• Archer picking up a 60% stake in the V8 Supercars motor sport business.
• HealthCare hospital group being offloaded by CHAMP Ventures.
• SME-focused private equity firm Anacacia Capital taking majority stakes in commercial plumber Planet Services Group and Roofsafe Industrial Safety Enterprises.

Also bucking the trend against IPOs and providing a fillip to IPOs in 2012 is Blue Sky Alternative Investments, whose private equity business has invested in Lenard’s Chicken, toilet group Viking Rentals, Beach Burrito Co and Paradise Motor Homes. Blue Sky closed its IPO earlier this month, and is aiming for a listing in late January.

But amid concerns that SMEs will be frozen out if the European sovereign debt crisis worsens and wholesale debt markets continue to be frozen, Browning advises SMEs to be prepared.

“What will happen is for those who are wanting to continue to access banks, they’ll have to be even more prepared for that, go to them with considered and robust investment cases, even more robust than they may have needed to previously,” he says.

“If you don’t put extra diligence in to preparing submissions, you might find it tough.”

“Make it as easy as you can for banks to understand why lending to you makes sense.”