Date: Fri 6th November, 2009
Venue:
Winners roundtable
Representatives from the winning companies of the Insider Dealmakers Awards North East 2009 met to discuss the future of dealmaking in the region.
Panel:
Marion Bernard, chief executive officer, NorthStar Equity Investors
Alasdair Greig, investment manager, NorthStar Equity Investors
Michelle Cooper, investment manager, NorthStar Equity Investors
David Stevens, corporate finance, KPMG
Rod Wilkinson, corporate finance, KPMG
David Sinden, senior partner, Newcastle Financial Solutions Centre, Yorkshire Bank
Robert Phillips, partner, Muckle LLP
Jeff Fryer, business development manager, Co-operative Bank
Michael Smith, corporate finance partner, Tait Walker
How have things changed since the summer, how are businesses in the North East coping at present?
Marion Bernard – From our point of view (investing in early stage technology companies) we are continuing to see increased deal flow. We’re seeing companies seeking equity finance. We’ve seen some fantastic opportunities and have invested in about ten companies this year, including Vertical Wind Energy. This is a new business in the North East which specialises in cost effective micro wind energy generation. We led the investment panel for this and brought on board some other private investors.
Alasdair Greig – The other sector that’s held up reasonably well this year is the gaming industry. It’s been popular due to consumers staying at home, so we’ve invested in a couple of these companies. Antics Labs and AmbiEx are two, both companies were based outside the North East but have moved some of their activities here. This is another area where the region has a growing reputation.
David Stevens – There’s been a shift since September. There is stuff coming through the door now that is of much higher quality; six months before it was variable to say the least. There’s been a general shift, private equity is becoming a lot more upbeat about the situation. I don’t think anything will complete until the middle of next year though. There’s a lot of money out there to be invested, it’s about structuring the opportunities for the private equity houses to make it easier for them.
Rod Wilkinson – I think that’s absolutely right, for the larger deals, the availability of debt finance is still very important, and that’s why the smaller transactions companies have continued to do deals. Larger deals do need debt, my sense is the banks are open for business and want to lend, the quality and due diligence around the opportunities have got to be right for them. There’s less debt going into transactions so the prices are coming down. I think vendors are accepting that. We’ve seen enquiries increase in the last four weeks or so.
Robert Phillips – We were talking to a business yesterday that had an opportunity to grow, but it had a problem with the quality of its mid-tier management. It recruited good quality trainers who had come out of the banks, such as Northern Rock for example. These people are shifting sideways and it’s providing training for the future.
Bernard – The challenge is to make sure there’s enough opportunities to keep these skilled people within the region.
Greig - On the skills subject, we’ve invested in a number of companies from outside the region recently that are looking to set up operations here. I think they look to the North East as perhaps somewhere where staff loyalty is stronger and the wage bill a bit more reasonable.
How important is the Low Carbon Economic Area status to the region?
Michael Smith – There are some interesting opportunities around this sector. Renewables and wind power in particular are good sectors for the North East. It’s another example of a sector that has prospered here this year.
Wilkinson – In general the North East has done well over the last 12 months and we have good reason to be positive going forward. The new funding will help smaller businesses, and the private equity sector is desperate to invest money now.
Jeff Fryer – We’ve got quite a powerful renewable energy team at the bank. There’s a lot of expertise to be tapped into.
Michelle Cooper – We can only fund these ventures at a certain level and they are very expensive ventures to take to market. The Nissan programme is an example of public sector and industry working together – you need that next level of investment to make it successful. I think we’re starting to see more of this, we’ve had deals with the Carbon Trust to try to maximise the investment that we have.
Phillips – I think its right that there are opportunities in the region around green and clean technologies. We’ve been involved with Narec and others at certain stages of deals as a local adviser, but then what happens is you hit the buffers slightly, as the company you are dealing with then gravitates south again for legal or planning information that is specific to that sector, and the whole thing starts to drift south. As a region I think we need to work together more wherever we can.
Wilkinson – It’s difficult though - what’s the solution? We work together as a region wherever we can. There are some areas that we don’t have expertise in.
Stevens – At KPMG we have a renewables team in London and we get their advise whenever we need it. It’s critical to our business model and we keep the local links but get the broader knowledge.
Wilkinson - You have to do it this way because otherwise a lot of businesses will automatically go and work with people in London. It’s more difficult in the legal sector I think.
Fryer – We’ve got a similar model at the Co-op. We've got renewable experts in London, who we have talked to a couple of times in the last 12 months about renewables transactions, we have a local relationship, but we get the expertise at a national level. It’s how you promote yourself I think. We have to sell ourselves as a region and not be scared to say we can do this locally.
Wilkinson – We need the to use PR to maximise our successes. Thinking about the Quantum deal, when we did that deal absolutely nothing was happening in the market, there was no private equity transactions of that size across the whole of Europe. What it’s meant is that lots of people now want to come to Newcastle.
Bernard – It’s good to be able to introduce new entrepreneurs and businesses to the region. We’ve had lots of cases where they weren’t planning to base themselves here, but once they came here and realised the quality of people and premises on offer, they wanted to move here.
The Quantum Specials deal won Insider’s North East Deal of the Year. What led to the deal being kept within the region? How was the deal different to how it might have been 18 months ago?
Stevens – We spent 9-12 months with the business before entering into a transaction. There was a complicated shareholder agreement in place, we had a corporate shareholder as well as some individuals, there was issues around this that we helped them with. There was a lot of preparation and strategy meetings to get to that point where you inevitably build up a relationship with the key people in the business and the shareholders. Timing is everything. If we’d had our own way I think we might have waited to see what had happened, but the corporate shareholder at that point had said “yes, we want to go for it now and we’ve got a deadline”. That deadline was to do a private equity transaction in four months which is difficult at the best of times, let alone now. Over the 12 months before I think we had become a trusted adviser and they asked our opinion and so we were able to bring in other local advisers.
Wilkinson – The biggest challenge at the early stages of this deal was explaining the business to people because it is very niche. It wasn’t a business area that the private equity or banking world had understood or come across. Yorkshire Bank banked it but they had not lent it any substantial amount of money, so there was a relationship locally. But the ability to lend leverage into the business had not been stress tested. One of the first main things we did, that felt novel at the time, but in fact wouldn’t be now, was to treat the banks like private equity houses, so the banks got the same information and number of meetings.
Stevens – We had four banks interested, and we were talking to them every day. We were effectively working for the banks side aswell. It had to be done that way because it was a sector they didn’t know, we had to give them lots of info and make that easy for them. One of the other things we did that isn’t novel now but was at the time, was to get a focused piece of commercial due diligence that was essential in getting the bank over the line.
The Jeremie fund is due to start in January. What will this mean for the region and why do you think the North East is attracting so much investment at present?
Bernard – We’re one of the companies who are seeking to win funds from the Jeremie process. Of course it’s fantastic for the region, £125m has been raised to support business in the equity gap. And this money should attract further investment into the area, as well as attracting more businesses into the region.
Is the North East well placed to come out of the recession?
Phillips – It’s not a huge step for us to come out of recession. We’ve got the new funding and banks with good people in them here. I am, however, a bit worried about the political climate moving forward. There aren’t many Conservative politicians in the North East and with the limited funds that the government will have, if I was an MP I’d want it to be spent in my constituency. So although we’ve got Jeremie, I think we will be on our own in the future.
Smith – There are still a lot of businesses that will inevitably go. We thought there would have been more at this stage in the year, but they may hang on until after the election now.
Dave Sinden – The cost of money is still quite low, and businesses are still just about hanging in there with very low interest costs at the moment. Rates are going to go one way, not in the short term, but possibly after the election and beyond. Plus there is only one way tax can go.
Wilkinson – It hasn’t been that bad for us, but if we could stay as we are for a bit that would be good.
Sinden – I always say you can only work with the resources you’ve got. You don’t realise how many employees there are out there who don’t want to step into management. They don’t want to lose their lifestyle, they don’t want the stress. It’s a cultural thing which we need to change. The North East is a dependent culture - to see a real change in the North East we need to educate our kids and instil more ambition.
