Adaptive selectiveness

In an attempt to remain ahead of the curve, corporate financiers are realigning their strategy; becoming increasingly selective when it comes to accepting mandates and clearly establishing the viability of a project's fruition and clients expectations. But while aware that there is likely to be a 30-40% drop in deal activity in 2008, many still believe that the mid market (EV EUR10-400m) offers a significant number of opportunities that are there for the taking.

Time is money

It is a truism that time is money, and advisers are taking steps to make sure that their resources are allocated efficiently. The overriding optimism that characterised the market 12 months ago has evolved as the mid-market has begun to experience the effects of drying liquidity and consequently corporate financiers, like GPs, are becoming more selective. This selectiveness is not just concerned with scrutinising a target company's trading. Corporate financiers are now more careful and proactive about every aspect of a transaction, verifying whether the deal can be financed and checking the credentials of the potential buyers and their commitment.

The role of the corporate financier has fundamentally changed. To make up for the lack of liquidity they now also assist clients in sourcing and arranging finance for a deal. "Banks are very capricious in their behaviour - the type of deals they decide to invest in changes on an almost daily basis," observes Jeremy Furniss from Livingstone Partners in London. In most instances, no single bank is confident enough to underwrite deals and financing is often provided by a club of lenders. Ed Griffiths from DLA Piper's corporate team confirms this tendency when stating that "deal certainty has become an issue; in the UK even mid-market club deals have included up to six banks, and they now commonly involve four." This evolution in the deal process has led to the prolonging of deal closures, which have increased from 2-3 weeks to 3-4 months depending on the sector and the deal value in question.

Advisers are also emphasising the need to educate their clients in view of entertaining clear expectations. It is important for clients to be aware that multiples have experienced a blanket reduction and assets that are still selling at pre-crisis prices are far and few between. "Detailed initial conversations with clients are critical to explain the current market, pricing and especially the lengthened timeframe on most deals. In the case of private equity operators, this is particularly important. In the UK and Europe, there is a greater amount of equity being used, but the returns are affected and this leads to private equity houses to drop," says Neil Collen at Livingstone Partners in Madrid.

In terms of the implication the increased time and effort has had on fees, opinion is split. In Spain for instance, Collen argues that "greater deal competition keeps a pressure on the pricing and thus the fees are not seeing an increase." By contrast in Italy, and based on a rough estimate, average fees have increased by 15-20% according to Eugenio Morpurgo, CEO of Fineurop Soditic.

Buy-side/sell-side opportunities

The Spanish and Italian markets are reacting to different constraints. The Spanish market is struggling in the aftermath of the credit crunch and the burst of the real estate bubble, with sectors directly and indirectly related to the construction industry feeling this reality the hardest. Italy meanwhile, has been for the most part sheltered from these occurrences.

Advisers largely agree on several points when it comes to mandate selectiveness, whether sell- or buy-side. Firstly, most suggest that the mix is still dominated by the sell-side, where the higher risks result in higher fees. "Where previously 75% of the mandates were on the sell-side, this figure has, in some instances, dropped to 55%," claims Collen. Morpurgo suggests that the situation is similar in Italy where, at least for Fineurop, "the sell-side/buy-side mandate split is close to 50/50."

Secondly, they agree without dissention that opportunities still exist in the market. "Going by the number of lights still on at night is an encouraging indication of how business is doing," asserts Griffiths. Corporate financiers in the UK, Spain and Italy, concur that interest remains high from both strategic and private equity players. "Many of our clients are not driven to sell by macroeconomic conditions but rather by personal ones, for example retirement or succession issues," says Furniss. Strategic players seeking to pursue their internationalisation and fill in gaps in their global presence now have more time to go through the buying process, as it takes private equity houses longer to find debt. This, however, does not dissuade private equity players from remaining competitive and with considerable funds to invest, more and more are shifting towards a buy-and-build strategy.

Thirdly, given their declining popularity among buy-side and sell-side clients, advisers are increasingly staying away from auctions. Indeed, the number of auctions they are involved in is significantly decreasing in favour of more proprietary deals and pre-emptive offers. Less time is involved and price expectations can be more easily negotiated.

From educating their clients and clarifying their expectations, to the nurturing of relationships less subjected to macroeconomic factors, corporate financiers are reacting to their environment. It seems that, whether you are talking human evolution or finance, natural selection and adaptation are the keys to survival.

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• Southern Europe