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Corporate transactions in a volatile market: could alternate finance be for you?

Paul Gooley Paul Gooley

Under the best of circumstances, a week is a long time in any active corporate transaction process. It’s constantly subject to external forces — market valuation considerations, stakeholder approvals, availability of credit, to mention just a few.

The current environment, against the backdrop of the COVID-19 health crisis and the ensuing economic downturn, is one that few dealmakers have ever experienced. As politicians, economists and those of us in the transactions sector can attest — the challenges faced now far exceed those of the GFC.

Many transaction processes have paused until greater certainty on the external outlook and each company’s longer-term maintainable earnings level can be determined. Some companies have quickly re-focused and shifted their resources to liquidity management and the immediate steps required to ensure business continuity and ability to trade out when conditions improve.

We are seeing this across all industries as consumer and market confidence takes a nosedive. The priority is liquidity and ensuring long-term survival. The Reserve Bank of Australia has injected some $90b into the financial system, and the banks are offering favourable rates and concessions to support small business, in particular, to remain afloat. Unfortunately, many businesses will be ineligible for support in the event it is required.

Despite the unprecedented volatility of the credit and equity market, we are encouraged by discussions with the alternative debt and private capital market participants who have capital available.

Private debt and equity sources are not publically listed or traded, and can come from superannuation, institutional investors and high-net-worth individuals.

Unlike traditional funding options, many private debt and equity investors will seek opportunities to deploy capital into businesses to bridge this liquidity crisis and provide additional balance sheet strength for when markets improve. Clearly, this initial interest will be targeted at more defensive industries to the health crisis, such as technology and healthcare and those businesses with a securable asset base. Over time, it will broaden as the recovery path becomes clearer and a credible plan can be supported to reach a sustainable business.

Private debt and equity investors may be an option to consider if you require alternate funding. We work with our partners, Neu Capital, to provide clients with deep access across these markets. They recently shared a helpful guide to navigating such processes.

If alternate funding is an option for you, there are some key things to consider to secure it successfully.

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Start planning now

Most importantly, are you proactively planning? Start planning well ahead of time as these processes are likely to take longer than expected in this period of volatility.

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Understand your options

Do you understand the various funding options available across debt and equity instruments and the appropriate providers of such funding?

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Robust forecast

Can you present the business outlook through a robust three-way financial forecast that models funding scenarios for key operational variables over varying timeframes?

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COVID-19 response plan

Do you have a documented COVID-19 response plan? Does it address the risks that are arising in your business?

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Data for due diligence

Have you collated a dataroom of all key information that will be needed to ensure an efficient due diligence process?

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Is there a clear agreement amongst shareholders, the Board of Directors and current third party funders on the parameters by which any process would be run and undertakings to act in certain ways where required?

We do not know when this period of volatility will end, but it will. In the transaction world, it has certainly shaken market confidence but there is still funding available for the right companies. Businesses that have planned and implemented robust liquidity strategies will be best placed to take advantage of available funding opportunities and resume more predictable operational and transactional activities when we come out the other side.

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