Dealmakers look to navigate uncertain landscape
Rising costs hit business confidence – but interest from foreign buyers in Scottish businesses remain strong
Although advisors report an encouraging start to 2023, the economic backdrop means few are willing to make bold predictions about the months ahead.
“There is definitely an air of uncertainty in the market at the moment,” admits Donnie Munro, head of corporate at law firm Harper Macleod.
“Business owners, lenders, investors and buyers are all trying to interpret the various economic indicators for the year ahead particularly when it comes to inflation levels and interest rates.”
The rising cost of borrowing has inevitably impacted on investors who leverage debt, but Munro also argues cuts to energy bill support for businesses will have affected “both cashflow and confidence for a wide variety of industries”.
However, the domestic financial challenges do not appear to have dampened the appetite of foreign buyers for Scottish businesses and assets, with several well-known names changing hands in recent months.
High-profile acquisitions included healthcare AI specialist Blackford Analysis, which was spun out from the University of Edinburgh in 2010, being bought by global life sciences company Bayer.
Houston-based private equity firm SCF Partners also purchased Aberdeen’s Global E&C, which employs more than 1,000 people on onshore and offshore projects, from Global Energy Group, which retain its other energy businesses.
Among smaller deals, Spanish digital services consultancy Sistemas acquired Glasgow’s New Verve Consulting.
Significant domestic acquisition deals involving Scottish firms included Coatbridge-based Lees, manufacturer of meringues, teacakes and snowballs, being bought by Finsbury Food Group in a £5.7 million transaction.
Several Scottish firms also hit the acquisition trail including Irn-Bru owner AG Barr which acquired the remaining 38.2 per cent equity stake in MOMA Foods from founder Tom Mercer and the other minority shareholders for £3.4 million.
All-Scottish mergers and acquisitions (M&A) deals included Bishopbriggs-based security firm Connelly Group Holdings acquiring Renfrewshire safety and security business Brookfield Alarms in a deal advised on by Harper Macleod.
Private equity (PE) firms have continued to be active in recent months, following a record 2022 when Scotland bucked a gloomier UK-wide trend. Analysis by KPMG UK identified 51 deals involving Scottish firms with a total value of £3.5 billion in 2022, up 69 per cent on 2021.
According to Gerald McLaughlin, head of corporate finance at Wylie & Bisset, PE firms are now more willing to invest in smaller businesses and to take a longer-term view.
“PE firms traditionally sought an Internal Rate of Return (IRR) more than 20 per cent, with a three- to four-year investment period, but over recent years many have been more comfortable with a longer timeframe, with the advent of ‘patient capital’ deployed by some business growth funds benefiting SMEs that are seeking to scale-up their enterprises,” he said.
“PE firms are looking for SMEs with a unique service or product, a solid management team and, for new developments, barriers to entry for competitors so that there is an opportunity to develop that offering and roll it out on a much wider basis.”
Among the most significant recent funding deals, Advanced Clothing Solutions secured a £10 million investment from growth equity fund manager Circularity Capital.
The move is aimed at accelerating the Glasgow-based firm’s push to become one of Europe’s largest circular fashion providers specialising in clothing rental, subscription and resale.
Snappy Shopper, the Dundee-based home delivery platform which works with convenience stores, raised a seven-figure sum from existing investors Highland Technology, Kelvin Capital and Scottish Enterprise.
In the technology sector, Glasgow-based HR software firm Gigged.AI – which works with clients including the BBC and the University of Edinburgh, completed a £1.6 million seed round led by Par Equity alongside existing investor Techstart Ventures, Edinburgh-based strategic design firm Nile HQ and several entrepreneurs.
Recent months have also seen a clutch of Series A funding deals by high-growth firms including golf technology firm Shot Scope which raised £2.7 million in a round headed by Guinness Ventures and supported by Scottish Enterprise, Old College Capital and angel fund Equity Gap. Shot Scope was advised by PwC.
In the life sciences sector, PneumoWave closed a £7.5 million Series A round to help develop a platform for remote wireless monitoring of respiratory changes in high-risk patients.
The round included £5.2 million equity from new investor Scottish National Investment Bank, alongside £2.3 million from existing investors Scottish Enterprise, IIG, Equity Gap, Alba Equity and London and Scottish Investment Partners.
Dxcover, a Glasgow-based company developing a blood test that can detect cancer at an early stage, raised £9.7 million through a Series A round and grant funding led by Eos Advisory, Mercia Asset Management, Scottish Enterprise, University of Strathclyde, SIS Ventures and Norcliffe Capital, and joined by US-based life science investor Mark Bamforth of Thairm Bio.
Recent buyout deals in Scotland include Empteezy Group, the Livingston-based industrial safety products firm, sold by owner Bruce Wishart to its management team with backing from Chiltern Capital.
South of Scotland Enterprise also provided a £285,000 grant to support a management buyout at the Rowan Glen yoghurt factory in Dumfries & Galloway. The plant had closed in October but under managing director Alan Baxter the new company aims to increase its workforce to 25 by the end of this year.
A six-figure funding package from UKSE, alongside input from private investors, also supported a management buyout at Lesmahagow-based fleet vehicle graphics firm OPG.
Among employee buyouts announced since the start of the year, Livingston James became Scotland’s first recruitment firm to move into staff ownership. Chief executive and co-founder Jamie Livingston will continue to lead the Glasgow-based company following the transition.
Glasgow-based personal insolvency firm Harper McDermott, which trades as Trust Deed Scotland, also transferred into employee ownership in a deal advised on by Grant Thornton.
Scotland’s quota of stock market listed firms looks set to continue to decline in the first half of 2023, with sausage casings manufacturer Devro receiving an improved takeover offer from Dutch firm Saria Nederland BV, while North Sea explorer HurricaneEnergy has also received multiple proposals in the formal sales process it kicked off at the end of 2022 and Aberdeen-headquartered energy services firm Wood revealed it had rejected three offers from US private equity group Apollo.
However, Edinburgh’s Capricorn Energy called off a proposed merger deal with NewMed Energy and is reviewing strategic options for the group.
Elsewhere, Scotgold Resources, which has a gold mining operation near Tyndrum, raised £2.5 million in a placing supported by directors and significant shareholder Nathaniel le Roux to ramp up production.
Although the economic backdrop remains challenging, Max Scharbert, a senior director in Anderson Strathern’s corporate investment team says he is “cautiously optimistic” about the remainder of 2023 given the lack of usual warning signs of a prolonged recession such as high unemployment or supply exceeding demand.
“There is a lot of negativity in the market just now, but I am not convinced it is based on economic facts. We need to be careful that these doom and gloom predictions don’t scare the market further and become a self-fulfilling prophecy,” he said.