The last few months have seen a constant stream of depressing economic and financial news, writes Catalyst Corporate Finance's Justing Crowther.

While the credit crunch started as a distant financial event in the US the effects and ramifications have now well and truly landed at the doorstep of businesses and consumers here in the UK. Rising commodity prices and the implications of the credit crunch are posing huge headaches for politicians and regulators who seem to be lurching from one crisis to the next.

At a time when consumers and businesses are likely to be curtailing their spending the government is hardly in a position to replace it due to the high levels of public expenditure of recent years and therefore public borrowing.

An economic slowdown is inevitable, although whether we technically slip into recession (defined as two quarters of negative growth) only time will tell.

The first half of 2008 has correspondingly seen an overall slowdown in private equity investment and merger and acquisition (M&A) activity in the UK (despite the spike pre-April because of the changes to Capital Gains Tax).

The position in the East Midlands is no different, with our own review of midmarket M&A deals in the East Midlands highlighting a fall of 34% in overall activity in the first six months of 2008 compared to the same period in 2007.

The drop in M&A activity can be attributed to both buyers' inability to acquire in the current market, and sellers' reluctance to accept discounted valuations.

Investor-backed buy-outs were also down by over 30% in the first six months of 2008 whilst transaction volumes across all deal sizes have been affected by the lack of credit.

Analysis shows it was the larger transactions that were hit hardest.

In the first six months of the year the region saw an 80% fall in transactions between £50m and £100m, reflecting banks' inability to write large cheques and credit committees' increasing aversion to high leverage. The large midmarket deals that have been completed include Gresham's £82.5m MBO of Castle Donington-based Johnson Clothing Limited, a transaction which was completed with debt syndication from four banks including Lloyds TSB, Barclays, HSBC and Royal Bank of Scotland.

So where is the good news? I think there is some, both at a macro-economic level and also locally in the East Midlands.

At a macro-economic level slowing western economic growth will reduce global demand and should mean that commodity inflation slows over the coming year.

Prices may even fall back. There is already evidence of that at the pumps as supermarkets lower fuel prices and compete for customers more aggressively. Slowing commodity prices should also allow interest rates to fall, which will provide a boost for businesses and allow some liquidity to flow into the mortgage markets.

While there has been a slowdown in private equity investment and M&A activity in general there are still deals happening. Private equity has raised significant funds in the last 12-24 months and those funds will need to be invested in quality businesses.

While some sectors will be off limits for a while, others such as healthcare, renewable technologies, waste recycling and defence are still seeing significant activity. A number of wise private equity investors who have been investing for a number of years will say that a slowdown is the best time to invest - the skill is to find the right opportunities!

Overseas buyers are also seeing opportunities in the UK when valuations are low and the pound slipping. Far Eastern buyers, especially from India, are increasingly active and looking for opportunities throughout Europe but in particular in the UK.

Here in the East Midlands we are fortunate that the economy is well diversified and relatively robust. The universities are strong, the transport links slowly improving (although much still needs to be done) and the local development agencies continue to work hard and fight the regional cause.

Deals are still happening, with one particular pocket of activity at the smaller end where good ideas are now receiving the funding they need, through small private equity investors such as Catapult, other investors or through business angels. Catapult for one have had a record year, including three more investments in the East Midlands alone.

So while they may be small and still on the horizon, there are some crumbs of comfort for all of us doing business in the East Midlands as we look forward over the next few months.

Justin Crowther is director of Catalyst Corporate Finance

Source: Nottingham Evening Post

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