The creative thinking behind acquisition finance – Deloitte

With reduced lending by the banking sector, private equity funds are increasingly targeting private individual and family office investors to co-finance deals

Potential M&A investors in Spain have received little support from the banks as lending levels have dropped, says Javier Menor, an M&A Partner in the Barcelona office of Deloitte. Those wanting to acquire prime local assets are increasingly therefore looking towards alternative financings to get their deals through.
M&A is clearly struggling in Spain. Mergermarket estimates that Iberia was the second lowest major European jurisdiction for announced deal volume in 2011, accounting for 6.2 percent of overall activity (Italy was the lowest with 5.8 percent while the UK and Ireland was the largest with 21.5 percent).
Part of the problem for Spain is that the cajas (savings banks) are in turmoil and neither they – nor many other banks – have been actively supporting corporate companies’ expansion, says Menor. “As such, private equity houses have had to turn away from the banks and look towards other lenders to help maintain deal momentum.”
This is especially painful for many as the banks have unofficially opted not to support leverage buy-outs (LBOs); the historic engine of transactions in the sector. The reluctance to lend has meant a number of deals have been left in limbo by the lack of financing, he says.
“As such, private equity houses have had to turn away from the banks and look towards other lenders or alternative investment structures to help maintain momentum,” he says. His firm is currently involved in deals where agreements were reached and the final contracts drafted, but which nonetheless have had to be paused due to financial problems. 
Indeed, many of the private equity acquisitions closed in 2011 opted for alternative investments or equity swaps to get the deals through. Recent reported examples include Miura Private Equity’s €25m acquisition of a 65 percent stake in Guzmán Gastronomía from Nazca Capital, and Baring Private Equity Partners’ €9m buy-out of a 48 percent stake in ADELTE Group and Equipo Facility Services, neither of which involved any commercial debt.
“Private equity firms are being creative in their approach to funding deals,” believes Menor, who was part of the team that advised Miura and Baring on the two purchases. “They are looking towards wealthy individuals or families for capital and offering more generous terms to attract the investment.” 
Private equity funds are also opting to restructure deals to make them more attractive to such investors, he notes. This includes offering larger equity stakes, a mixture of equity and direct loans from non-banking third parties, and for the company management to have a larger stake should they participate in a buy-out.
In such an environment, the ability to offer deeper financial and technical advice in tandem with legal counsel is becoming more significant in getting a deal closed, he believes. By way of example, Deloitte has acted for Caja Madrid and presently the Catalan Government on sale and leaseback transactions.
“The advantage of taking a multi-disciplinary approach is that it has a broad range of expertises that can support alternative fund structures. Likewise, for us, a substantial number of the individual and family offices looking to maximise the profitability of their funds are already clients so we can match them with potential purchasers.”
Menor is aware, however, that such a development presents a potential “knock-on” problem for the banks; if they are not lending and private individuals now prefer to invest directly in transactions, they will not raise new capital to help fund future growth. This could create even deeper problems further down the line.
“Private individuals alone, of course, will not be able to fill the substantial financing void left by the banks and cajas. Even so, with lenders being hit so hard and private investors sitting on a decent reserve of savings, there is a feeling that such strategic injections could become more common.”
High-net worth individuals or family offices are being enticed to such creative solutions because they now offer a better return than traditional investments, he concludes. “The banks have very low interest rates on savings accounts, below four percent, while returns on private equity investments can reach as high as nine percent. This means that investors may be more inclined to take additional risk for a better return, which in turn will help provide the much-needed funding to kick-start M&A activity.”