The year of the deal: how private-equity firms turned a predicted slump into a boomtime

Katharine Byrne, Partner and Head of the BDO Corporate Finance Team, recently featured in the Irish Independent to discuss the do’s and don’ts of private equity, key things to prepare for and future growth opportunities.

Since the onset of Covid-19, many business commentators have tried with varying degrees of success to read the tea leaves on what is coming down the tracks for business investment.

Early predictions that investors would be more cautious with their money have proven misplaced, however, with a ‘wall of capital’ flooding the global private-equity market amid pent-up demand, as investors chase their next sugar rush.

Irish companies looking for funding are increasingly taking note, as domestic and international funds with bulging pockets battle it out for deals. The private equity market is red-hot.

Backing from private equity doesn’t come without its risks, though.

Private-equity firms traditionally make their money by buying businesses, reorganising them, and then selling them on – usually within five years and doubling or trebling their money.

Private equity also has had a reputation for coming into companies and hunting for ‘synergies’ (a practise otherwise known as slashing costs).

With private equity establishing itself as a significant player in the Irish funding landscape, why are more Irish businesses becoming targets for private-equity funding, what is attracting our companies to this type of funding and will it continue?

The current market 

Katharine Byrne says private equity in Ireland is getting better all the time. She says the first growth funds established after the financial crisis had now exited from investments, meaning businesses better understand how private equity makes its returns, and how to match it to their business objectives.

“As Irish businesses have got more ambitious, you can see the scale and size of their ambition are starting to be met by the scale and size of private equity that is available,” notes Katharine.

“The market is in a very rude state of health, is how I would describe it. There is so much capital available. But we are still making sure our clients and SMEs understand what that is, and ensuring they are smarter in how they access it – so they don’t just run to the first form of equity made available to them, that they take their time to get ready and prepare themselves for it.”

It’s not just technology and life sciences companies’ private equity works with. BDO has worked with a broad spectrum of companies in traditional sectors tapping into private equity. Katharine adds the three main examples where it had seen private equity most at work over recent years are in the insurance sector, health-related firms, and business services.

The do’s and don’ts 

She says the understanding amongst Irish businesses of private equity has improved dramatically, though there are still myths needing to be dispelled so more can potentially benefit.

People, she says, will often focus on “technology or digitalisation, or very large deals – and often Irish owner-managers don’t think private equity applies to their businesses. That is the myth we want to dispel.”

“If a business is ambitious and wants to scale and grow, or if they have a strong business that is growing but the owner isn’t at the stage where they want to take all that risk to grow it, they are the types of businesses private equity is very suitable for. They can partner and de-risk for the owner, and also enable them to grow without being shackled by debt.”

Even when a company seems ideal for investment, deals can go sour. Katharine says generally negative situations in private equity usually occur when parties haven’t done their due diligence and have rushed into a deal.

“It looks like a great deal, the valuations stack up – but they haven’t looked to see if the culture or strategic fit is there,” she says. “If there is a mismatch of culture and strategy, you already have a problem.

“References are important,” she adds, citing good communication and relationships as being vital to the success of an investment.

The future of private equity 

Katharine also believes activity in private equity will continue, though she has concerns over inflation and valuations.

“I think it will continue, and I think it is not going to dissipate,” she says. “There are obviously inflationary concerns and some valuation concerns that they have gone exceptionally high in certain sectors – but as the businesses continue to generate more wealth globally, they need to find more areas to invest in. The mid-market for us has become a lot hotter,” she adds. “2021 was affected because of the backlog of 2020 and Covid, but it has also been driven by it being the new area for investment globally.”

Katharine says BDO believes technology and digitalisation are going to be big areas, alongside sustainability. She believes smaller businesses are better at adapting to changing circumstances in these areas – making these firms attractive to private equity.

“Similarly, you’ve seen in life sciences and technology that Ireland has been a hub of activity for a lot of VCs and private equity – because they’ve been small and agile, and have also developed great technologies and intellectual properties that international companies want to access.”

"Private equity possibly gets in there earlier in order to scale them up and flip them out to larger corporates. It’s going to be busier than ever,” she concludes.

Content adapted from Irish Independent.