…. has created the UK’s first ICT mergers and acquisitions marketplace portal. James Goulding finds out more from Founder and Managing Director Nigel Cook
Like many of the companies it advises, Evolution Capital, a mid- market corporate finance boutique specialising in the technology, media and telecommunications (TMT) sector, has had to change the way it conducts business over the last 18 months, replacing face to face meetings and processes honed over the last 20 years with video communications and remote collaboration.
Founder and Managing Director Nigel Cook points out that successive lockdowns created real difficulties for a sector that, despite its reliance on data and process, is still very much a people business and dependent on human interaction, especially at the ‘front-end’.
“Corporate finance is a traditional field and we’ve all built processes that are based around face to face interaction. For the last 18 months we have had to do much of our work remotely and that creates challenges when you have to share information across multiple businesses and dozens of people and need to create that human element, which is still such an important factor when deciding whether or not to invest in or buy a business.”
Since founding Evolution Capital in 2003, Cook has seen certain processes transformed by technology, notably the replacement of the data room – a physical room where all the paperwork for commercial investigation was laid out, for which you needed a ticket to enter and were searched on leaving – with an electronic room and individual permissions to download and copy material.
Even so, the requirement for regular face-to-face meetings has never gone away.
When these were not possible, Evolution Capital, like everyone else, came to depend on video communications for meetings and negotiations, and while Cook prefers in-person interactions, he has no doubt that many of the changes we have seen are here to stay.
“Go back 18 months and a lawyer or a chartered accountant wouldn’t have been happy to have a camera in their house and be seen in a T-shirt. That wasn’t acceptable for those professions. Now, people are quite comfortable coming to a meeting in a T-shirt and if there is a child running around in the background, so be it. We have all had to change our behaviour and that has helped to change attitudes too.
“I think it is accepted that we are not going back to how we used to work. People enjoy working remotely; they like to work from home; and new technologies and processes enable work to be done faster. It is pretty certain that technology from now on will play a much bigger part in supplementing face to face interaction.”
To this end, Evolution Capital has built a new software platform, e-Accelerator, which provides a framework for matchmaking, information-sharing and benchmarking, where business owners can interact remotely with the Evolution Capital team and potential buyers/investors can understand more about businesses and their management teams (see box).
The launch of e-Accelerator comes at a good time for Evolution Capital, as M&A activity in the TMT sector has been running very hot, after a brief lull during the first lockdown.
“When the pandemic struck back in March (2020) things went very quiet, and for three or four months there was very little activity, but by the autumn most of the tech-based private equity (PE) firms were back in the market and looking for acquisitions. By the time we got to Christmas, there was a lot of competition for the best businesses, and since the New Year we have seen investors and PE firms moving funds from other areas in which they have invested, like travel and hospitality, into our space because it is seen as a safe haven and a good place to make money.”
Cook adds that the pandemic has also caused business owners to consider their options.
“When you have an event like the pandemic, it does bring forward decisions for entrepreneurs who are looking to retire, but it also creates opportunities for other entrepreneurs who are looking to grow because, whilst there have been limitations on organic growth because of restrictions on business activities, there has been another way forward, which is through growing your business and enhancing
its value through M&A. More and more entrepreneurs are seeing that as a route forward.”
Evolution Capital is well placed to profit from this activity as its rationale is to ‘build value’ and, as such, its services are in demand both from business owners and from a handful of buyers looking for investment opportunities, often as part of a ‘buy and build’ strategy.
That the company specialises in the TMT sector is another benefit, as changes businesses have made over the last 20 years have helped to make this a highly attractive sector for investors.
“PE clients and other investors clearly like the business model. The TMT space has changed dramatically over the last 20 years. Twenty years ago perhaps 30-40% of revenue would have been recurring revenue, because then a business, regardless of whether it was in telecoms, IT hardware or software, would be about selling systems that were hung on the wall, wiring the office and maintaining that network. Today, services are cloud- based and revenues are generated through connectivity to the cloud or the software you are accessing or the storage you are using. It is quite typical for fast growing, high value IT businesses to have a recurring revenue of 80-90%.”
This, Cook points out, is where the value in a business resides.
“In the last 18 months, very few businesses have performed as they did in the couple of years running up to the pandemic. Some have performed much better – those that were providing remote services – while others that were providing hardware and project installations have struggled to fulfil orders.
“What’s interesting in our space is that where businesses haven’t performed as well as before, it is largely because one-off projects or hardware/software sales have been held up, and that’s generally the smallest part of the value in a business. It’s the customer contracts, the recurring revenues that create the value and that pretty much continued throughout the pandemic.”
In its focus on building value for clients, Evolution Capital is much more than just a broker between buyers and sellers of businesses. It is also an advisory firm that can guide clients through the process of building value whether they are looking for a sale in the next six months or not expecting to realise value for many years to come. The important thing, according to Cook, is to be prepared for any eventuality.
“Business owners need to be ‘match fit’ for a sale at any point. A lot of firms that are growing through acquisition are approaching owners and asking for information and if you haven’t prepared your data, it is difficult to put your best foot forward. First impressions are obviously last impressions, and I do believe that owners need to have a good understanding of where the value is in their business and need to be able to respond to a buyer in a structured way.”
An Evolution Capital business review should also provide clarity for business owners who might not have considered the different routes open to them.
“In most approaches, an owner has some idea of their expectations from a sale, but they may not have considered all their objectives and the routes to achieving them. A business review will really define those objectives, which might be different for a family business with one founder/ majority owner than for one with half a dozen owners, all of different ages, who might all have different expectations of what they want to achieve from a sale. Some may want to stay with the business, others might want to part-exit and retire.”
Cook adds that failure to do the necessary groundwork in the preparation phase is another mistake commonly made by business owners.
“There has to be a platform of data that carries you all the way through the process. A common mistake is to come up with a short form and to agree a price with the buyer and then, once you have signed a head of terms and the investigation starts to take place, being unable to support some of the statements you’ve made or the performance that you’ve outlined. That leads to an erosion of the price that was agreed. The biggest mistake is not preparing for due diligence and the breadth and depth of the investigation that takes place, particularly now that the PE firms are very specifically looking for sustainability in a business.”
With 84 successfully completed deals, with a combined deal value of £602 million, Evolution Capital already has an enviable track record in the TMT space. The launch of e-Accelerate is an exciting new addition to its offering that will bring new efficiencies and opportunities for its 200 plus clients, as they look to enhance their business value.
For Cook, the future is clear. “We will continue to offer premium services to the mid-market. We have new methodologies and processes, which we have developed over the last 12 months, and we will use technology to supplement face to face activity, which has been fundamental to our process for the last 20 years, with interaction through the cloud and through e-Accelerate.”