Funding dilemma offers private equity opportunity

Fifty-three percent of UK entrepreneurs say their most likely source of funding for major business projects over the next 12 months will be their operational cash flow, compared with 36% last year.

The survey carried out by Deloitte, the business advisory firm, also shows that, in spite of tougher lending conditions, entrepreneurs continue to rely on banks as their primary source of funding (18.5%), followed by existing shareholders (10.4%). Whilst just 12% say external investment from private equity (4.6%), venture capital (3.8%) and angel investors (3.8%) would be their most likely source of cash over the next 12 months, down from 28% in 2008.

Paul Zimmerman, corporate finance partner advising entrepreneurial businesses at Deloitte, says: “Just two years ago, the overarching theme for many entrepreneurs was growth and planning for an exit to private equity or corporate buyers, or planning for flotation on the stock markets.”

However, in stark contrast the survey reveals that current business conditions have created an alarming reliance on working capital at a time when over a quarter (27%) say they are having to monitor their cash position daily. Therefore, with entrepreneurial businesses looking to strengthen their balance sheets, corporate finance experts at Deloitte suggest the market is ripe for investment from cash rich private equity groups in those businesses that look poised and certain to renew growth.

Zimmerman explains: “Given the fall off in the mergers and acquisitions market and the drop in valuation multiples, many entrepreneurs have shelved their M&A plans. Instead their prime focus is on strengthening the operational performance of their business to emerge as ‘winners’ from the recession and this requires investment.

“For many businesses this investment will come from internal resources but for some, external capital will be required. The survey shows nearly a third of entrepreneurs say banks have reduced their lending facilities – clearly a dramatic change from two years ago. And therefore, this represents an opportunity for private equity to invest in ambitious entrepreneurs.”