Bowmark Capital Survey

Findings from a survey of 172 entrepreneurs in the UK has found that one-third expect revenue and profits growth of more than 20% over the next 12 months. The research, commissioned by Bowmark Capital, a UK buyout player which targets companies with enterprise values of between £10-75m, was carried out in September and October 2007 and was directed at managing directors and CEOs of companies in the £10-100m turnover range. While Charles Ind from Bowmark cautions against seeing this as evidence of abundant optimism in the SME space as he believes the situation has since worsened, he does remark that "there is an element of scaremongering across the wider press. Bad news is better than good news".

CEOs positive about private equity

Of the small and medium sized companies questioned, 86% said they had a good relationship with their private equity backers. Battered by negative publicity throughout 2007, it is revealing to find that businesses that have undergone buyouts in the lower mid-market - what Ind calls "the deals that are the lifeblood of private equity" - are resoundingly positive about their experience of buyout houses. "There is a lot of misinformation in the public domain about what private equity is about. What you find is that when you actually speak to the people who've experienced it, that experience has nearly always been positive," comments Ind. Moreover, 71% of those surveyed felt that private equity backers set realistic targets, compared with 45% who agreed that bankers did, and 58% said that private equity partners provided useful guidance on strategy.

Ind puts the optimism conveyed by entrepreneurs in September and October partly down to the fact that entrepreneurs are by their nature optimistic. The strong anticipated earnings growth in the lower mid-market is also what keeps Ind and Bowmark Capital interested in this end of the market. Ind says: "We specialise in investing in smaller companies because here we see the most exciting potential for value creation over the next five years. There are definitely stronger relative returns to be made from investing in smaller companies."

The underlying confidence apparent from Bowmark's research contrasts strongly with findings published by a BVCA poll. According to BVCA research, the proportion of firms viewing the UK as an attractive place to do business has fallen by almost 25% over the past quarter from 93% in September to 70% in December. By presenting this statistic alongside the other results - which include 71% of the BVCA members polled expecting the regulation burden to increase and 86% believing the burden of taxation will grow, the atmosphere appears gloomy. However, a cup half full reading tells us that actually 70% of private equity insiders still believe the UK is an attractive place to do business. A closer, less dramatic interpretation is that the outlook is not as bright, but it is still overwhelmingly buoyant.

What about across the Channel?

Like Ind, Michael Diehl from Activa Capital expects that if the survey was conducted in November and December in the French market the results would have been different. "The environment at the small/medium end has deteriorated since September/October. It is now not business as usual, but business as usual as it was before 2005/06," he says. French buyout player Activa invests in business with a value of between EUR20-200m.

In France, Diehl reports that there are many quality businesses available to buy, but the debt financing is not available over EUR200m and where it is on deals below EUR100m, banks are offering significantly lower multiples and being a lot more selective in what they do. The shrinking in the debt available would be more bearable if it was followed by a more realistic pricing strategy, but "prices for assets have not yet fallen, especially compared with the stock market which has taken quite a beating," explains Diehl. As a result, private equity firms are finding it hard to find buyers at the prices they are asking for and the market for second, third and fourth generation buyouts, which as in the UK, represent a third of all buyouts in France, has partially dried up. Diehl isn't worried though: "Ultimately SMEs are the bread and butter of these banks. It is important for banks to be present among SMEs and, as such, the debt will come back."

Diehl's confidence extends beyond the return of banks to the buyout game. He argues that where the French economy has underperformed relative to the UK in recent years, it is now well-placed to see off the economic slowdown which is threatening the UK - indeed, 56% of private equity firms believe the UK will grow by just 1-2% in 2008 according to the BVCA's survey. "Consumer spending has been the real motor behind the US and UK economies over the past five years. It has had a lot less of an impact in France," he explains. Adding into the equation that the economic cycle is less distinctive in France and that Nicolas Sarkozy has promised to scrap the 35-hour week, removing the lid that has been held on French salaries and potentially paving the way for a rise in consumer spending, and the outlook for the French economy is positive.

THE GREAT FRENCH ESCAPE

The UK private equity industry was characterised by negative media attention and political hostility in 2007, culminating in the Walker guidelines which mean that private equity-owned companies of a certain size will have to disclose financial details. The French buyout market, the second largest in Europe by volume and value, has had to endure no such thing. Michael Diehl considers why not:

- There are fewer tax breaks for private equity in France meaning French buyout houses and their executives pay more tax;

- L'Association Francaise des Investisseurs en Capital (AFIC), the French industry body, has a long-standing and effective policy of communicating the positive impact of private equity to the broader public;

- Most importantly, though, Diehl believes that, private equity in France has escaped negative press scrutiny because it is yet to attempt to takeover household names.

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