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Looking forward to…. future equity fundraisings

Posted on 7 October 2020

Unfortunately, with so many sectors of the economy having put recruitment on hold whilst they weather the current storm, it was inevitable that the recruitment sector would be significantly affected by the current economic crisis. Clearly, the most affected by the crisis are those recruitment agencies that target the most affected industries, such as hospitality and leisure. However, the sector is huge and within it some areas have been able to prosper despite the difficult circumstances. This includes those recruitment companies specialising in healthcare, tech and finTech, business restructuring, delivery and logistics.

Long term, we hope to see these markets expand. Furthermore, those recruitment businesses that have been quick to embrace working from home, have invested in technology and built a solid but adaptable operational foundation will be in the best position to support and benefit from that future growth.

It is unrealistic to expect banks to provide the sector with the levels of financing likely required to fund further growth. We expect that in the near to medium term, businesses in the sector will have more success raising capital from the private equity and private capital communities. Although some private equity funds may have been forced to make additional capital available to support their portfolio companies, there is still substantial cash available for investment. Combining this with the fact that sound investments made now, in a depressed market, could give rise to some very attractive returns, means that many private equity investors will be keen to deploy capital as soon as possible.

However, valuations at present are still uncertain especially as trading data will be skewed. Investors may well want to see a few more months of trading data going forward in order to get a handle of how the business is adapting to the current situation.

So what can businesses do now to better position themselves for investment? The businesses that are able and prepared to innovate, diversify and improve the digital side of their business and, looking ahead the next few years, potentially overhaul their strategy, will be best-placed for attracting investment.

Before equity funders part with their cash, they will want to see a credible, sustainable plan for growth. A robust set of fundraising documents would include:

  • an information memorandum setting out details of the business and highlighting the strategy for achieving growth,
  • financial projections, and
  • legal and financial due diligence materials.

Investors will almost certainly expect a detailed summary of the impact of COVID-19 on the business. Businesses that are attractive to investors will be able to showcase resilience and adaptability in the face of COVID-19.  Such a summary is likely to address:

  • action taken to protect the business (e.g. rent deals, furlough, adaptive working programmes, deferrals of VAT/PAYE/business rates and applications for CBILs),
  • the digital offering and how clients have been engaged with,
  • how the business model and working practices have adapted (which may still be evolving but should be clear at the time of fundraising), and
  • preparedness for future lockdown measures and ability to withstand further shocks.

While there is cause for optimism, a dose of pragmatism will be needed when it comes to valuations and the form of investment. Needless to say that whilst it has never been easy for businesses to attract investment on good terms, it is currently even more difficult.  We are seeing that investors are even more cautious and investment rounds are taking longer to close. That said, the rewards for patient and resilient businesses that are able to prove that they can continue to deliver despite the current hardships could be considerable.

Given ongoing uncertainties, market-topping, full valuation deals with shareholders selling out and exiting completely are unlikely to be seen for a while. However, less risky deal structures are likely to prevail.

Business owners will need to consider whether it is better to wait (if they have the luxury of waiting) for valuations to move closer to pre-COVID-19 levels or whether to fundraise now. There will surely be businesses in the sector which are willing to accept a lower valuation now in order to secure funding to grow and outperform competitors as we emerge from the pandemic; these could end up being the big winners.

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