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Are business owners rushing to de-risk?

26 February 2021

John Ridout, Wealth Manager

As the world continues to battle a global pandemic, you could be excused for assuming that corporate activity may largely be on hold. The reality is quite the opposite, with 2021 enjoying the fastest start to the year for takeovers since the 2008 financial crisis. $39 billion worth of deals completed between 1st January and 5th February 2021.[1]

What this shows is that deals can be completed effectively over video calls. More importantly, however, it would appear that the pandemic may have made business founders increasingly aware of how concentrated their wealth is in one asset. Many are now looking to reduce this risk by taking on external capital at an earlier stage than they otherwise would have done. This desire to de-risk, coupled with the void left by traditional banks reigning in their balance sheets, has been met by cash rich and deal hungry private equity investors happy to oblige.

Whilst there are currently some distressed areas of the corporate world, most notably the high street (as we covered in a previous article), a large proportion of M&A activity is happening in sectors and companies that have come through the pandemic in a position of strength.

"Since the start of the pandemic, some sectors have experienced stronger deal flow – technology and healthcare in particular – as asset prices have been driven higher by a flight to resilience by equity investors, escaping the challenges of more pandemic-hit sectors," says James Chapman Andrews, an M&A Partner at Alantra Corporate Finance in London.

There are other important forces at work that could be influencing business owners' decisions - most notably the potential for tax changes on the horizon in the upcoming budget, which we discussed earlier this month here. With many concerned about the potential for an increase in Capital Gains Tax (CGT) and the removal of Entrepreneurs' Relief, they may be looking to lock in their gains at a lower tax rate.

According to James Chapman Andrews, "The anticipation of CGT changes is definitely a key driver of current M&A activity, particularly in smaller end deals. Sub-£100 million founder entrepreneurs are very focussed on that potential change and are seeking to realise their years of investment tax efficiently. However, with continuous second- and even third- guessing of likely government tax policy on coming out of the pandemic, there is very real potential that no changes are made to CGT in the March budget statement. This means that founders and shareholders run the risk of rushing to exit, accepting lower prices in doing so and hitting real sellers’ remorse."

At LGT Vestra, we have seen an increasing requirement recently to provide advice and pre-exit planning to entrepreneurs, who wish to have robust personal plans in place prior to selling their business. As an entrepreneurial business ourselves, we recognise the importance of preparing an exit plan, often as early as possible in an entrepreneur's journey.


Read more from The Brief:

Rethinking growth in a post-pandemic world

The special bond between fixed income and equities

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