Sitting in his firm’s boardroom at 3 Assembly Square, where we are occasionally disturbed by the sound of drilling in preparation for soon-to-be new neighbours KPMG, Geraint Rowe seems upbeat on the outlook for deals.
It has been well-documented that the last 18 months have been extremely challenging in all facets of deal activity, but Rowe said that Cardiff Bay-headquartered Gambit Corporate Finance is seeing some encouraging signs.
One of four partners in Gambit, Rowe, 38, who has a first-class degree in zoology from Bristol University, said: “Q3 and Q4 of 2009 saw the bottom of the market in terms of activity with regard to value and actual deal size.
“However, now good deals are still getting funded and there is an opportunity, particularly with those subsidiaries of overseas’ companies that are non-core and perhaps the parent has some trading difficulties. This is providing potential for an increase in MBOs, which we forecast last year.”
He described the equity markets as being “awash with cash”, adding: “At a sensible gearing level, whether that be two to three times Ebitda, those deals can be funded. But like anything in the current marketplace it is about the right structure and the right entry price.”
On deal valuations, although more grounded as a result of the current economic realities, Rowe said that in some sectors they had become more “polarised”.
He added: “In 2007 in the IT sector the scale of valuations was seven to 20 times Ebitda. However, today it goes from three to 24 times. So what you are seeing is a polarisation, where at the top end businesses are still attracting good value, but those that are perceived to be difficult, or provide less value added to their ultimate customers, have suffered through the recession in terms of valuations.”
He said the current outlook was also being aided by an unravelling of pent-up demand created during the recession.
Rowe added: “Corporates sat on their hands and didn’t buy anything of note and equally they didn’t divest a great deal. We are seeing some of that catch up now.”
On Gambit, which he joined in 1999 from KPMG Corporate Finance, he said: “As a firm we are in a more than satisfactory position in the current market. And we have some pretty strong hopes for 2011 as our pipeline is larger than it has ever been, and that is down to the marketing and repositioning of the business.”
That “repositioning” has recently see Gambit open an office in Birmingham, with further UK expansion planned.
He added: “Our pipeline is great, but it needs the entrepreneurs to press to the button on that, whether on the buy or sell side.”
On the Assembly’s new strategy on business support, which will see a move away from grants to a repayable model and greater investment on infrastructure like broadband, Rowe said: “I don’t think Wales can continue to exist in its current form with a grant culture. If you look at what has happen in Ireland with companies like Microsoft and Gateway, they are clearly exploiting grant and corporation tax incentives then disappearing quickly as the monitoring period ended.”
And he also questioned the culture of providing grants to indigenous entrepreneurs. This, he said, had created a perception that when WAG’s investment bank subsidiary Finance Wales was established its funding “should be free”.
And he believes Finance Wales’ commercial focus has played a very positive role in growth finance provision.
“You have got to look at the success of Finance Wales in terms of the up to £1m [equity investment] historic space and with its new fund being up to £2m,” said Rowe.
“They have been hugely successful and done a good job. Since his involvement [investment director] Peter Wright has pushed the business forward tremendously.”
Rowe concurs with the findings of the Rowland Review, chaired by Welshman Chris Rowlands, that there is a market gap in the £2m to £10m funding space for growth-focused SMEs.
The UK Coalition Government has committed itself to providing an element of funding towards a new growth capital fund for SMEs, with the majority coming from financial institutions.
The fund will also have a regional dimension, with a view to not reinventing the wheel but it being managed regionally by existing expertise.
On a potential role for Gambit in any fund he said: “One would look at the commercial merits at that point in time, but I cannot see a scenario where we would do that because first and foremost we are lead advisers and provide corporate finance services to our clients. Therefore if we became an investor I think it provides too much of a conflict for our core business.”
The UK Government is also currently taking soundings on whether there would be any merit in establishing regional stock exchanges in the UK. Once there were exchanges in most major UK cities, including Cardiff and Swansea
On a Welsh stock market Rowe said: “If there was liquidity, and it was cheaper [than Aim], then yes. However, I don’t believe you can achieve the two [together].
“Clearly there can be a mechanism which the Irish have used very effectively based on its association with Deutsche Boerse, in terms of using an electronic platform to promote trading. But where would the investors come from?
“It’s an interesting idea and I say this with my Welsh hat on, but I cannot see the liquidity issue ever being resolved.”
So what about a larger West of England and Wales exchange? Rowe said: "I think investment -ready entrepreneurs will find the capital. The key issue, as I see it, is clearly the cost and efficiency of liquidity.
“If we had Welsh-based companies where they cannot raise capital in either the private equity, venture capital or business angel markets, and a Welsh stock exchange is required to enable them to do that, then you really have to start asking yourself why they haven’t been able to source that capital elsewhere?
“Is it a case that they cannot source the capital, or source it as the right cost? If it’s the latter, and a Welsh exchange can provide not access to capital, but access to more cost effective capital, than absolutely it should be number one on the agenda.
“However, I don’t think it is the latter and I think a Welsh exchange would be seen as a way of raising money, rather than raising the right sort of money at the right cost of capital.
“For us wherever the cash comes from what we advise our clients is that it isn’t just about getting the money, but making sure that it is appropriately structured, from an appropriate investor and at the right cost and right commercial terms.”
With regard to indigenous businesses he said there is still a culture of owner managers wanting to keep all the equity, with a tendency of selling out too early.
On entrepreneurship he believes it can be created, joking that one common trait among wealth creators is a “short attention span”.
He added: “Yes, I think you can teach entrepreneurialism with two aspects being important, the first being the desire to take a commercial calculated risk.
“We also work with a number of management teams who were not born to do what they do, but have evolved over a period of time.”
He said there is a talent drain of entrepreneurs out of Wales, but this was not necessarily a bad thing
He added: “Entrepreneurs do leave Wales and why shouldn’t they? I have three kids and I am sure their mother would be very upset at some stage if, say, they decided to go the States for three years, but I would be encouraging them to do that.
“You have to build a career and potentially experience things beyond the borders of Wales. If you then come back you are a more rounded person, which can only be good for Wales.”
Operating in a niche firm Rowe said he and his co-partners “live and breathe” the business.
He added: “We class ourselves as entrepreneurs. You can be a partner in a large organisation, but those guys don’t run that business per se. Being in a corporate finance boutique gives you a different empathy.”
As for life beyond corporate finance, Rowe said: “Yes, probably, but I certainly don’t see myself doing anything else for the next 10 years. We are going through a time of exciting evolution at Gambit, which we are all focused on implementing.
“That is a huge goal for me. The day that one finds the job unexciting and driving into work a chore that’s the time to move out of corporate finance. I’m not there yet.”
He said a number of deals executed have stood out for a variety of reasons.
One cited was Gambit's work on taking retailer the Peacock Group private from the London Stock Market, where the firm advised the pension fund trustees on the implications of the transaction, as well as the refinancing last year of Irish-based Standard Brands, which is the largest fire-lighter brand in Europe.
Rowe said: “We refinanced Standard Brands last year at the height of the banking crisis, which was a hell of an achievement.”
Rowe lives near Cowbridge with his wife and their three young sons.
