Jun 18, 2024
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CFO Interviews
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Roger Esler

Jun 18, 2024
Jun 19, 2024
CFO Interviews

Roger Esler

Roger Esler has been one of the most prolific and successful dealmakers in Yorkshire for over 30 years, holding senior positions at SG Hambros Investment Bank, KPMG, Deloitte and latterly Dow Schofield Watts (“DSW”).

One of the Corporate Finance and M&A partners for DSW in Leeds, Roger opened the Leeds office in 2012 and is a major shareholder. He was previously Corporate Finance Partner at Deloitte for 11 years which included leadership in the regions for PLC and Debt Advisory.

Roger has been no stranger to awards and accolades throughout his career. A Chartered Accountant, he was placed first nationally in the Order of Merit in his ICAEW final exams while at GT in Sheffield.  Since specialising in Corporate Finance, he and his teams have won numerous awards, including Insider Dealmakers Corporate Finance Team of the Year no less than seven times, Insider Dealmaker of the Year in 2016, Rainmaker Corporate Finance Team of the Year in 2017,  numerous awards over the years for specific deals at both the Insider Dealmakers and Rainmaker events, as well as recognition in the Yorkshire Accountancy Awards: Corporate Finance Team of the Year in 2018 and 2019 and Niche Firm of the Year in 2020 and 2021.

The deals market in Yorkshire has evolved dramatically over this period and has notoriety for periods of boom and periods of challenge. The market has been more unpredictable over the past couple of years, with rapidly rising inflation and interest rates impacting economic confidence and cost of capital.  2024 is likely to be a period of stabilisation and this has driven a larger pipeline of deals across the market, which should continue into 2025.

We could think of no better time to share Roger’s story and take the opportunity to get some of his predictions for the coming months.

Give us an insight into the M&A market in Yorkshire over the past 12 months

It typically takes 6-9 months to execute an M&A transaction. Q1 in 2023 was busy, with deal completions stemming from 2022 processes which represented the tail of the post-Covid bounce. The dramatic rises in inflation and interest rates led to a couple of quarters in 2023 of talk but little action, with the economic uncertainty and high cost of debt resulting in businesses deferring deal processes and investment decisions. Recognition of inflation and interest rates peaking, and economists starting to call for interest rates cuts in 2024, created a dramatic rebound in transactional dialogues in Q4 and this has progressed into 2024.

What have been the main drivers behind the deals that have been completed?

A more benign economic environment and confidence drive deal flow in the broadest sense. Things don’t need to have fully recovered but positive change in indicators such as inflation and interest rates needs to be in sight. Like any market, it’s about visibility of the future and not dwelling on the past.

During the more uncertain periods, formal processes dwindled as business owners held back plans and decisions and private equity investors focussed on their portfolio investments rather than exits and new investments. The deals that were getting done included a lot of smaller bolt-on acquisitions by corporate consolidators (i.e. lower risk incremental growth) and business sales resulting from unsolicited approaches by strategic trade buyers taking a long-term view and generally not needing to borrow.

What is the pipeline looking like now?

The mix of deal prospects is returning to a more balanced profile. Business owners are rebooting their succession plans and considering the merits of a trade sale vs a management buy-out. Raising external growth for investment is back on the agenda and private equity funds are being encouraged by their own investors to crystallise returns through exits and invest undeployed capital in new deals. As the cost of debt starts to fall, we would expect debt-funded deals such as acquisitions and shareholder equity release to pick up significantly.

Concerns over a rise in CGT can create a surge in private company deal flow. At this point, the general belief is that a Labour government wont change a great deal in mainstream taxes. I would expect that concern to gently build after the election; an alignment of CGT and Income Tax rates would have a dramatic short to medium-term impact on business sales but, in my view, would not be conducive to a growth economy. One thing is certain and that is that CGT will not go down.

Where is the current appetite for Private Equity to invest?

Are they investing?

There is a considerable amount of undeployed private equity capital as well as venture finance for earlier-stage companies. Fund life is long, however, being 7-10 years and, as discussed earlier, investors do hit “pause” from time to time and focus inward to ensure existing investments are getting the right attention.

What is notable currently as economic confidence recovers, is that investors in the funds (“LPs”) are pressing for realisations and for those firms raising new funds (which takes time), they must evidence successful exits from the previous fund to do this. Hence, there is investment demand to deploy capital and to facilitate exits and, as many deals involve moving from one private equity investor to another (e.g. a secondary buy-out), such deal flow is picking up dramatically, as well as exits to trade buyers.

What are they looking for?

The basic criteria are long-established: strong management, a differentiated growth plan that will at least double profit over 4-5 years and a visible exit route. Most find the prospect of growing faster by acquisition an additional lure.

The evolution in the private equity market has been the tiering of firms broadly by cheque size (so creating a focus on lower-mid, mid or large businesses), sector preferences (e.g. tech, services, circular economy) and situational focus (e.g. complex carve-outs, turnaround). The challenge that this has presented is that successful firms tend to raise larger funds and want to write bigger cheques, with new fund entrants not always fully filling the space below. In addition, the preference for service businesses has diminished the appetite in some areas of the industrial sector. Put simply, the investor audience is broader for a tech-enabled service business of scale than for a smaller manufacturing business. The good news is that there is a much more diverse debt and hybrid capital market which represents a possible alternative for the latter to private equity in structuring a buy-out deal.

The Venture Finance market (e.g. VCTs, EIS funds) is awash with cash but must invest in compliance with strict structural and company age criteria and is looking for very high growth propositions. I’ve never felt the Yorkshire ecosystem for tech start-ups is as strong as it could be, with deal volumes being suppressed by a lack of supply of good and qualifying investment opportunities and the funders burdened with overly restrictive and misplaced criteria together with often being based in London.

Is there any impact on the due diligence processes to complete the deal?

We are thankfully past the period of examining the “Covid impact” but there is to some extent still a need for DD to understand the impact on a business of supply chain issues, inflation and so on.

In general, the period of uncertainly has raised risk awareness and this is evident by the time buyers and funders are spending on getting the detail right in Heads of Terms, before going into the DD process and then not being shy in asking for an extension to “top up” with current trading. Businesses need to be very well prepared and advised for this type of process if they want fair value.

We see so many successful SMEs across Yorkshire – sat on strong balance sheets, generating positive cash and growing profits, but with no exit strategy. What is the best advice for the shareholders?

How do they balance taking an immediate return with building Enterprise Value?

Thankfully we still have a tax regime that encourages shareholder returns through capital growth rather than dividends. Hence many SMEs have strong balance sheets and the ability to acquire or invest. In practice, shareholders have very differing levels of risk appetite: a multi-generational family company might be much more cautious than a management-run business with a shorter exit timeline.

Formulating and funding a business plan will reflect the risk appetite of that business. A business that prefers to adopt a defensive, “quality of profit” approach will be lower growth than one that invests to grow and, all other things being equal, will have a lower valuation multiple. Good corporate finance advice on transaction options and deal structures needs to be in the context of understanding a particular client’s attitude to risk.

Planning an exit can’t start too soon (note that private equity investors have an exit strategy before they even invest – so that’s a c. 5-year view), and if a sale is an option (and for some of course it is a “never”), investment plans need to be considered in the context of when and what that exit event will be. For example, looking at the return on investment on capex, evaluating an acquisition (the upsides, risks, timings and “value arbitrage”, where the valuation multiple of the target is lower than the buyer), together with the form and cost of capital (i.e. debt vs equity) and/or building a management team to create the option of a buy-out. Such planning allows an assessment of the impact of shareholder value and whether the uplift in EV and Equity Value (since the latter is impacted by any debt taken on for example), justifies the risks.

The key advice is that if the exit is a medium to long-term option, undertake business and strategic planning with that in mind and take early advice to help understand the impact of investment (including acquisition) strategies on shareholder value and the deliverability of that exit.

For those that don’t have an exit aspiration but want to grow, defend a market position, pay dividends etc, there is still an exercise to optimise the source of debt and/or growth equity finance since private capital is now a very broad and price-elastic market.

We advise them to recruit a CFO and then speak to an expert such as yourself – any comments on that?

There is no worse a false economy than not having a CFO with skills commensurate with the business and its plans.

Business management and planning and investment appraisal require information, both historical and forward looking. Trade buyers are diligent and undertake deep and wide financial, legal and commercial investigations into a business prior to buying, Advisers need information to advise and funders to write a cheque. An owner might think that he/she has a great business and the historical accounts prove that, but proper financial analysis, budgeting, forecasting and investment appraisal will ensure that advice will be “informed”, a maximum valuation can be properly negotiated, that funds can be raised and structured on the best terms, and that buyers will pay the highest price and not try and renegotiate a deal after DD because they didn’t have the right information and/or understanding at the outset.

The election will put political factors at the front of everyone’s minds. Two questions:

1 – How much influence does politics have on business confidence and transactions?

All businesses, funders, investors and advisers need certainty and predictability to make and execute decisions. Political instability breeds uncertainty in economic policy and elections generate confusing rhetoric and salesmanship. It’s the stability of the tax regime and economic policy that are important to businesses and the deal market more so than the wider and important politics of say the NHS and Education

2 – What are the most important changes that the government can make to grow a strong business sector in Yorkshire?

A government needs to preserve and ideally enhance the incentives for capital growth to generate economic growth in a market economy. This includes everything from subsidies and tax incentives to invest in capex and R&D, to a tax rate differential between capital returns and income (e.g. dividends), without which business owners simply won’t accept the risks of growth strategies. A government should also enhance the ability for individuals to access private equity and venture finance investing: e.g. introducing tax incentives to invest in “older economy” private equity funds and loosening the investment criteria of VCTs. The private capital markets are in truth skewed towards investing larger businesses and the funding for SMEs is always more challenging; increasing the public’s involvement in private equity investing would have a dramatic impact. How is it logical that a retail investor can invest in a start up in an EIS fund or an “idea” in a crowdfunding investment but find it so much harder to put money into a long-established, growing, manufacturing business that wants to grow.

What is the longer-term future for the deals market in Yorkshire?

Strong, exciting and for those in it, pragmatic.

20-30 years ago, the professional community in Yorkshire was trying to convince itself that we could advise any business on anything. In reality, the City and Global Investment Banking market has a wide proposition for larger PLCs and the very largest of private equity backed businesses (e.g. international bond markets, IPOs) that is hard for a regional market to compete with.

What has changed in those years has been the breadth of debt and equity funding providers to the mid and lower-mid private capital market and the quality and international appeal of the businesses in the region. This presents an incredible long-term opportunity for advisers to advise and businesses to access that advice on a wide array of funding solutions and reach an international buyer audience. Technology has enhanced that ability significantly.

It’s in the regional markets where this business population has diverse, entrepreneurial decision-makers and where people buy people. Best advice requires understanding those businesses and their owners and giving tailored advice on how to generate and execute a deal. It is not generic.

In the City and large corporate land, the environment is totally different: professional boards with NEDs (not owners) and boards that buy brands and, of course, access to complex financial institutions.

Horses for courses.

I don’t see that dynamic changing. Great regional businesses will have many options open to them and it is the advisers on the ground that will give them best advice through a relationship built up often over many years.

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