Murray Jack: Impact of COVID-19 could drive Scottish business to embrace private equity on larger scale

Murray Jack: Impact of COVID-19 could drive Scottish business to embrace private equity on larger scale

Murray Jack

Murray Jack, partner at Addleshaw Goddard, discusses how the coronavirus crisis could drive Scottish businesses to embrace private equity on a larger scale.

Despite Scotland being home to a number of prominent private equity (PE) house the country has witnessed an element of resistance among some businesses to embrace PE as a source of funding.

With the exception of Aberdeen which has enjoyed a buoyant PE environment – largely driven by the oil and gas services market – Scotland, as a whole, has witnessed a smaller proportion of PE activity when compared with other parts of the UK, perhaps as a result of a more established culture of PE in locations such as London, Manchester and Leeds.

The reasons for this geographical disparity are hard to pinpoint. After all, we have a globally recognised and accepted angel network and many fantastic businesses – why has private equity not developed to the same extent for later, larger investments?

The absence of trailblazers to encourage others has been cited as a potential reason. However, if we look back over the past few years, there are strong examples of PE-backed Scottish businesses excelling – perhaps most notably the stellar success of Scottish Equity Partners-backed Skyscanner which was sold to Ctrip for £1.4 billion.

Looking at additional reasons as to why some businesses have been reluctant to consider PE, fear of losing control has cited as a potential factor. Whilst, this is the case in buyout deals, it is important to note that private equity can take many different forms, and minority stakes – with more restricted controls – are not uncommon.

In recent years, there have been signs that the tide may be changing in Scotland in relation to how businesses view and engage with PE, with a notable rise in the number of deals and analysis from KPMG suggesting that activity held up in 2019 amidst political and economic uncertainties.

Over the last 12 months Scotland has witnessed a rise in the number of PE deals taking place. In 2019, LDC backed Edinburgh-headquartered telecoms and ISP provider Commsworld in its UK growth drive. Other significant examples include Par Equity’s backing of Glasgow-based cashback app, Swipii, and BGF’s recent investments, including the Paint Shed.

It will be interesting to see how much of the often cited “dry powder” of uninvested funds has been deployed in Scotland during 2020.

Over the last six months, many businesses have sought support by accessing the UK government’s funding schemes including furlough, CBILS, and the Future Fund in an attempt to help them navigate the impacts of the global coronavirus pandemic, and hopefully emerge in a more optimistic position for the final quarter of 2020.

However, with the furlough scheme set to end on 31 October, and funding likely to be harder to access from both government and traditional sources, many businesses will be required to look to alternative sources.

Many businesses have adapted as a direct result of the disruption caused by COVID-19 – building completely new business models or migrating to digital platforms. Companies may well find that their customer base and the way they interact with it may change, and they will need new strategies to make the most of the post-pandemic environment.

Private equity funding, alongside other forms of investment, can support businesses as they seek to grow and exploit new opportunities and strategies.

More importantly, PE investors can also bring expertise to a business, particularly around the adoption of new technologies and business models, bringing a network of talented people which can add significant value in times of adaptation and refocus.”

In recent years, Fintech, healthcare, and telecoms have already witnessed investment in PE. As we look beyond the COVID pandemic, it will be interesting to see if more traditional industries in Scotland, such as manufacturing, construction, transport, or food and drink can find new opportunities to adapt their business models, and look for new funding partners to support their firms.

No sectors are immune from the effects of the past six months, and businesses within the most disrupted sectors may find the ideal partner in private equity.

Time and energy invested in considering if a PE partner is the next right step will be time well spent.

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