A majority of UK directors (80%) are opting for debt finance, despite other options available to them, such as private equity, the public markets and the use of angel investors, according to research by advisory firm Baker Tilly.
Results highlighted a suspiciousness among UK company directors for the private equity industry. Only 54% of survey participants said that they would recommend it to others, and more than a quarter would actively recommend avoiding it.
Richard Hilton, chief executive of Gymbox, a UK-based gym, recently carried out a management buyout. He explains why his management team opted for debt over equity. “For most business owners the key is retaining equity. The beauty of having an all debt deal is that you keep 100% of the equity and therefore retain complete control, autonomy and ownership of the business, which hopefully results in you gaining greater reward down the road.”
Other findings from the report state a majority of UK directors would consider an MBO, with just 15% ruling out the possibility of an MBO.
Forty-three per cent of UK directors expect private equity investors to realise their investment through a trade sale, with 17% expecting exit via a flotation and 16% via a refinancing.
Sixty per cent of managers expect private equity investors to introduce them to a strong network. And 87% of UK directors recognise the need for an exit and succession strategy, with 13% saying they have no exit strategy and no plans to put one in place.
Robert Donaldson, head of M&A and private equity at Baker Tilly, said, “Directors can find that despite a historically close relationship with their bank, equity finance is more flexible than debt, albeit more expensive. Debt is fine as long as the business continues to perform. However, if trading difficulties are encountered, the relationship can be tested. Funding a business using debt rather than equity inevitably exposes a business to greater risk.”
Lighthouse Global, an independent business research consultancy, conducted Baker Tilly’s Direction survey. It conducted interviews with senior decision-makers among the UK’s growing businesses.