Finding the right Partner for your Business

Successful business owners are regularly on the look-out for opportunities to partner with high quality, sophisticated investors to help achieve their business objectives for growth and expansion. With the local IPO market experiencing a period of instability (see our October blog), businesses can increasingly benefit from exploring and evaluating private capital options to fund growth or access liquidity. In 2020, we expect the significant investor demand for attractive investment opportunities seen in 2019 to continue.

Australian corporates generally have sound balance sheets and are actively seeking to supplement low organic growth options with higher returning, synergistic growth options.  Furthermore, there is a significant amount of surplus private equity and venture capital funds competing for a limited number of quality investment opportunities. Additionally, the low interest rate environment is driving family offices and high net worth (‘HNW’) individuals to search for higher yielding assets.

For business owners, selecting the right partner often depends on who can provide the most capital at the cheapest rate, however it may be equally important to find a partner who can assist from a strategic or commercial angle. Cheap capital is not the only consideration driving a business to greater success and partners are finding it increasingly important to differentiate their capital proposition from others. There a range of considerations a business owner should evaluate to assess which investor type may be an appropriate partner.

Strategic Corporates

Finding the right partner for growth is not simply about finding the partner with the deepest pockets, rather there are a range of additional considerations such as identifying partners who can provide valuable expertise, insights, solutions or networks to address the many challenges a business may face, including product and customer development, new market entry opportunities and potential synergistic growth opportunities with other portfolio companies.

By partnering with another business, companies can differentiate and diversify themselves to achieve business growth and expansion in Australia’s competitive business landscape. Strategic and joint partnerships using innovative investment structures provide business owners with options to retain ongoing / majority ownership interest in their underlying businesses. However, business owners should be cognisant that following a strategic investment, businesses may lose their perceived independence by aligning with one industry player and may also inadvertently limit their exit options to ultimately sell the business down the track. Business owners can implement clearly defined shareholder protections and rights to mitigate these risks and retain a suitable level of control and flexibility.

Financial Sponsors

“Dry powder” (an informal term used to describe the cash available for investment opportunities) has continued to grow in recent years and is now at an all-time high. Private equity managers, venture capital investors and superannuation funds continue to search for ways to deploy the estimated US$14.8 billion of dry powder in the Australian market (according to the Australian Investment Council) by identifying innovative deal structures and alternative asset classes.

With significant private capital available, financial sponsors may be attractive partners for business owners that would prefer to remain private with a sophisticated investor onboard who is motivated and incentivised to continue to increase the value of the business. Business owners should consider the level of ownership selldown they are willing to accept as financial sponsors generally seek a significant (and often controlling) ownership stake and will invest with a targeted hold period on the basis of reasonably high return expectations that may not always align with long-term founder objectives.

Family office and high net worth Investors

HNW investors are increasingly looking to diversify their investment portfolios outside of traditional investment classes of listed equities and real estate and into alternative investment classes including direct investment in private companies. Investment objectives for HNW investors are often more passive in nature and can provide a suitable funding solution for private businesses requiring small to medium sized capital injections.

HNW investors may be attractive to companies operating in niche markets or to start-up / early growth businesses which have an insufficient track record to secure institutional investment. Businesses may also benefit where the initial investment required is too small to attract institutional funds.

Summary

With a low interest rate environment and a record level of investible dry powder in the market, it is currently an opportune time for private companies to assess the benefits of taking on a strategic or financial partner to assist them to execute their growth strategy.

If you are looking for a capital solution or a new partner to support the growth of your business, please feel free to reach out to one of the Record Point team and we can help you navigate a path forward.

For more Information

Record Point is an independent corporate advisory firm located in Sydney, Australia and San Francisco, United States. Our team of professionals serves public and private companies across numerous sectors with a particular focus on healthcare, technology, consumer and industrials. Our team has more than 50 years of experience successfully leading and executing in excess of A$30 billion in transactions. Contact us to discuss your next strategic move on +61 2 9078 8250.

www.record-point.com.au

What is the right value?

Whether you are a long-term business owner, entrepreneur, company director, private equity professional or any other shareholder you will no doubt have to visit the question of “what is your business worth?” at some stage. 

In particular, at the time of a merger, acquisition or other capital activity this can be one of, if not the most challenging question that must be answered i.e. “what is the right price?”

In hindsight, the answer is that the value is the price at which a willing buyer and seller are prepared to transact (just like when you sell your house); however, how do you know whether you are making the right decision on either side of the transaction?  

In order to assess the valuation of a business, there are a range of tools and techniques that should be applied to make an informed judgement. Before visiting a company valuation, however, it is important to understand that these tools are only as accurate as the information being utilised, requiring careful preparation before any analysis is performed (discussed further below). 

Broadly the most common valuation methodologies fall under the following categories:

The valuation lens

To make and assessment of value it is important to understand the purpose of the valuation. With a defined purpose in mind, a financial advisor will leverage their experience to interpret various data points using the tools above to assess a value range. The following common situations contain unique factors that may result in different valuation outcomes for the same business:

Of note, there is an important difference between minority and majority based valuations, which is evident in the control premium ascribed where an acquirer pays to gain control of the cashflows (and assets) of the business, also often allowing them to access synergy value. 

Whether a company is publicly traded or held privately may also impact the valuation, particularly in a minority transaction. When benchmarking a private company against a set of (typically larger) public company comparables, there is usually a discount applied to the public trading multiples to reflect the smaller size (typically higher risk) and lower liquidity. 

Be prepared

As businesses don’t always operate in a perfect world environment, it is best to be prepared in advance for what may happen, rather than waiting and reacting in the moment. 

We see the benefits in any value discussion when clients undertake a strategic review of their business and assess the options and alternatives to unlock value, which may also incorporate a sale readiness assessment to avoid some of the mistakes often made when selling a company as discussed in our prior Blog https://www.record-point.com.au/the-three-most-common-mistakes-in-preparing-to-sell-your-company/

We recommend that our clients keep each of the key valuation inputs up to date to allow them to react quickly and with confidence, to assess the appropriate parameters of value for any given situation. Key steps include:

In summary

Ultimately, valuations are highly technical, analytical and resource intensive, and even the most comprehensive corporate valuations include some subjectivity and qualitative consideration.

If you are wrestling with the topic of valuation please feel free to reach out to one of the Record Point team and we can help you navigate through the situation to find the right path forward. 

For more information

Record Point is an independent corporate advisory firm located in Sydney, Australia and San Francisco, United States. Our team of professionals serves public and private companies across numerous sectors with a particular focus on healthcare, technology, consumer and industrials. Our team has more than 50 years of experience successfully leading and executing in excess of A$30 billion in transactions. Contact us to discuss your next strategic move on +61 2 9078 8250.

www.record-point.com.au  

A quick look at the Australian IPO market

There has been a lot of recent commentary about the Initial Public Offering (“IPO”) of Latitude Financial Group (“Latitude”). By way of background, Latitude was previously the Australian lending operation of GE Money which was acquired in 2015 by a consortium of private equity investors. In an environment where terms like “fintech” and “buy now, pay later” are getting a lot of investor attention, Latitude’s second run at the Australian Securities Exchange (“ASX”) was highly anticipated as the largest IPO of the year, however its owners terminated the IPO when it did not receive sufficient investor support. Similarly the anticipated ASX IPOs of Onsite Rental (equipment rental), Education Centres of Australia (education provider), PropertyGuru (South East Asia-based online real estate classifieds), MPC Kinetic (pipeline and energy construction) and Retail Zoo (owner of Boost Juice) have recently been terminated leading to some speculation on the impact these might have on other pending IPOs in the 2019 and early 2020 pipeline. It is in this context that we thought it would be useful to take a step back and look at the status of the Australian IPO market in 2019 more broadly.

For the first three quarters of 2019, the ASX200 index performed strongly, increasing by 18.5% which was in-line with strong returns achieved by most other major global markets, and it continues to trade near the highest level in over 10 years. Similarly, the forward PE ratio of the ASX200 index, representing the ratio of price to anticipated earnings, continues to trade in the high teens reflecting strong and resilient public market valuations.

Over the same period, there were 37 IPOs on the ASX and an overwhelming majority have delivered good returns for investors, including 18 of the largest 20 IPOs. Positive performers include software companies such as FINEOS (+25%), ReadyTech (+18%) and Whispir (+1%), although Life360 has struggled, down ~25% from its IPO price.

Notwithstanding the above, 37 IPOs for the first 3 quarters of 2019 is far few than in 2018 and 2017 with 76 and 69 IPOs for the same period respectively. In addition to the number of IPOs declining, the aggregate size of the IPOs, representing the new capital raised, declined from $6.7 billion in the first three quarters of 2018 to $2.9 billion in the comparable period in 2019. Furthermore, in the final quarter 2019 there are currently expected to be up to 14 IPOs coming to market, which compares to 26 and 36 IPOs that ultimately listed in the last quarters of the previous 2 years. It is fair to conclude, that whilst the 2019 performance of the market and newly listed companies has been strong so far, IPO activity has meaningful declined.
Capital flowing into the ASX is heavily influenced by the Australian superannuation environment. As at the June 2019 quarter, approximately 51% of the $1.8 trillion of superannuation investments were invested in equities (almost half of which were in Australian listed equities) with almost $34 billion of new contributions entering the system in that quarter alone. Based on that information alone, it may seem unintuitive that more strong companies are not coming to market in order to raise capital and take advantage of the seemingly continuous flow of new superannuation capital seeking investment.

A key takeaway is that there is a divergence between investors’ appetite to invest in existing listed companies (including strong support for their follow-on equity raisings) as opposed to investing in new companies coming to market. There are many reasons why recent IPOs have not been successful, including market volatility and uncertainty, lack of earnings visibility and ultimately insufficient investor demand, making it clear that cornerstone IPO investors are being very cautious with their assessments of the quality of IPO candidates and their management team and are looking closely at the underlying business models and the achievability of forecasts. Another factor is that some private companies have become comfortable to bide their time through this period of uncertainty, taking advantage of low interest rates and an abundance of debt capital to support their growth strategies.

Despite the recent decrease in IPO activity, we continue to believe that the ASX is in good shape and is “open for business”. There are 5 companies who have targeted IPOs with proposed listing dates in November and we will be watching these closely. We expect that investors, who are flush with investable capital and have been starved of IPO issuances, will be supportive of investing in strong companies with aligned and motivated management at sensible valuations.

If you would like to discuss raising capital or realising value for your business, please get in touch with any of the Record Point team.

For more information

Record Point is an independent corporate advisory firm located in Sydney, Australia and San Francisco, United States. Our team of professionals serves public and private companies across numerous sectors with a particular focus on healthcare, technology, consumer and industrials. Our team has more than 50 years of experience successfully leading and executing in excess of A$30 billion in transactions.

Contact us to discuss your next strategic move on +61 2 9078 8250.
www.record-point.com.au

The three most common mistakes in preparing to sell your company

Welcome to the first Record Point website blog. Going forward, we will be sharing our thoughts on topics which we think are relevant to anyone with an interest in the world of Mergers & Acquisitions. Whether you are a founder, shareholder, investor, manager or adviser, we hope that you will find these posts interesting and informative.

In Australia, there are about 2,200 listed companies, many of which get a lot of news and attention, however there are more than 2.7 million registered companies (and growing every month), the overwhelming majority of which are privately owned. While not all of these are operating businesses, it is nevertheless a surprisingly large number for a country with a population of only c.25 million.

Each one of these businesses has its own story. Inevitably a considerable amount of sweat and tears was invested by its founders and early employees to establish the business by finding and developing relevant products or services, implementing processes and controls, finding customers, generating revenue, watching expenses and dealing with a wide range of daily challenges. With the challenges comes reward for those who find a successful formula. Besides becoming a source of employment and income, being part of a successful and growing business can be an opportunity to create considerable value along the way.

While there are a large number of ways to create value, there are a limited number of ways to realise that value. Most founders, shareholders and managers have little experience with this, and they should carefully consider whether it makes sense for them to appoint an adviser that they trust to guide them through the process. Selling a business might well be the single most important financial transaction for a founder, and to mitigate what might otherwise be a highly stressful period, any self-respecting advisor will work with the company and its key stakeholders to ensure they are well prepared before initiating any sale process or engaging with potential acquirors or investors.

This post highlights three common mistakes we see with founders and companies preparing for a sale.
  1. Starting too late
    The phone rings. It is one of your international competitors who states that they have been tracking your business for some time and admire what you have achieved in growing your business to where it is today. They are keen to send a team to Australia for discussion about purchasing your business, doing some due diligence and by the way, they are willing to pay top dollar if you engage with them quickly.

  1. Taking the process in-house
    A company could incur thousands of dollars by directing internal resources and involving external advisors in order to be prepared for a future sale process. While it might be tempting to take the process in-house, in most instances it becomes a side-lined project which finds its way to the bottom end of a long business-as-usual to-do list. We strongly believe that investing upfront in obtaining great advice and support to be prepared for a future value realisation event will yield a strong return in the future.
  2. Not considering the impact on other stakeholders
    It is easy to get caught up in the process and to forget that there are numerous stakeholders who are crucial to the ongoing success of any company. Shareholders, boards, management, employees, suppliers, customers and landlords are the obvious ones that are applicable for most companies and there might be others. It is important to remember that a sale process impacts on more than just the founders and shareholders. Preparing a communications plan and having a stakeholder engagement strategy in place could go a long way to avoiding unexpected and potentially value-destructive reactions from unsuspecting stakeholders in the midst of a sale process.

 

If you would like to discuss how best to go about preparing your business for sale, please get in touch with any of the Record Point team.

 

For more information

Record Point is an independent corporate advisory firm located in Sydney, Australia and San Francisco, United States. Our team of professionals serves public and private companies across numerous sectors with a particular focus on healthcare, technology, consumer and industrials. Our team has more than 50 years of experience successfully leading and executing in excess of A$30 billion in transactions. Contact us to discuss your next strategic move on +61 2 9078 8250.

www.record-point.com.au