Despite and perhaps because of the risk and uncertainty in the economy and financial markets, in Australia there is a growing amount of private money investing in turnaround opportunities in the mid market.
This private investment is coming from wealthy families and individuals (sometimes pooling their funds) mimicking the structures and strategies of private equity houses and hedge funds.
The enthusiasm of investors and borrowers when considering these transactions is tempered by the challenges involved while an important insight is that for the many transactions contemplated, it is only a few that are able to be converted.
Shape of the turnaround funding market
In Australia for larger corporations, turnaround and restructuring funding activity from private equity and hedge funds began increasing around the time of the GFC and this “mega” deal market has largely caught up to the rest of the world (to which it had been somewhat lagging!).
While these larger deals are often very “sexy” and involve significant funds, they are relatively few in number. The majority of activity is in the SME/mid market for deal values less $20M, which is generally consistent with the traditional M&A market.
Why is money moving to the turnaround market?
The growth of private money investment has been driven by (simply!) there being more wealthy private investors than there was (say) 10 years ago and increasing sophistication amongst such investors.
Further, some capital is being pushed away from listed and institutional markets due to:
– Concerns about risk whether related to Brexit, Chinese debt, property values etc.
– Lack of visibility/understanding of more complicated financial markets.
– Markets often not being driven by fundamentals, for instance the paradigm of concern about a potential interest rate rise resulting from a better performing US economy decreasing equity values.
– Limited returns and difficulty finding yield, capital growth and hedging opportunities.
What is required to make a deal happen?
The traditional “maxims” and challenges of attracting turnaround investment still apply, for instance:
– Ideally there is potential upside through scale, a transaction, market growth etc.
– Turnaround must be able to be demonstrated.
– Preference for turnaround issues being balance sheet not operational related.
– Limited ongoing funding requirement.
What is currently attractive?
There are factors (honey!) in the current market making certain companies attractive for turnaround capital and these include:
– Yield plays ie passively returning (say) 10% compared to (say) less than 5% in public markets.
– Tech/fintech, so hot right now! These are high risk/reward opportunities.
– Mining and mining services where there is growing confidence based on an assumption from many that the bottom of the cycle has been reached.
– Market sectors where there is high M&A activity including health, childcare, allied services and leisure.
– Anything about disruption!
How to connect turnaround and capital?
In the Australian market, the large majority of investments are sub $20M with challenges for connecting capital to the turnaround opportunities.
Bear in mind that the most likely investor in a private company will already have significant knowledge of the market of the company which gives them confidence in relation to the opportunities/risks/outcomes. If owners are lacking for connections into “investor circles”, good places to go looking for some “money” include:
– Investment collaboration bodies.
– Angel investor groups.
– Online market places, crowd funding and social media forums.
– Asking around!
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