January 19, 2021
In this first interview in the series, Ruby Sheera speaks to Chris Godsmark from Oakley Advisory for his insights on the tech market, the economy and his outlook on the future.
Hello, everybody. I’m here today with Chris Godsmark from Oakley Advisory. Chris, thank you very much for being here with us. We’re here to talk about the tech market, to talk about the economy, the state of the world going forward, as we’ve all come out of a very tough year.
What I’d like Chris to do, is start off by telling us a little bit about who he is, his business, which I’m sure many of you are aware of, and then we’ll go into some of my questions, looking at the future and the way ahead.
Great, thanks, Ruby. It’s Chris Godsmark, and I’m Co-founder and Joint Managing Partner of Oakley Advisory. This is a Corporate Finance business focused purely on technology and related sectors, but particularly telecoms, IT, software and online, which covers a whole variety of different industry verticals.
We set this business up in 2007; we’ve grown it right the way through. So typically, we do maybe around 15 to 20 transactions a year; the average deal size has grown in the last four or five years. A good size deal for us will be anything from let’s say £50 million valuation up to maybe £1 billion. We’ve just announced a deal, which is £1 billion.
We work right across deals from trade through to private equity, which is obviously a huge part of the market and what we do and all the relationships with private equity funds; and then into the public markets, where we’ve done IPOs and particularly M&A and take privates. We work with a lot of founders, a lot of entrepreneurs and we have done for many, many years. And, you know, obviously the markets at the moment, as you can imagine, are quite buoyant.
What do you think the outlook is for the tech market, and what impact do you think the last 12 months has had on it?
Well in our business, just to set the scene a little bit, we have around 20 professionals, and we’re an independent corporate finance business. We’re really purely focused on sectors which are pretty resilient to some of the trends that you’ve seen with COVID and the rest of it over the last 12 months.
We cover telecoms, IT, software, and also online, which obviously covers more B2C type of businesses. For example, we work with some quite big businesses, Just Eat, The Hut Group, OVO Energy, and others.
I suppose over the last 12 months, the sectors were fortunate, and if I’m being frank with you, not to cover food and drink, retail, and some of these sectors which have obviously been badly affected. I think COVID has had a number of impacts, which have in some respects, accelerated trends in our businesses. Because all of the businesses we deal with are driven by technology and change. And as we all know, change and technology transition happens much more quickly now than it did, 5/10/20 years ago.
COVID has really accelerated, as you can see with the fact that we’re doing this on Teams, it’s accelerated a transition towards effectively digitisation and IP. Ultimately the technologies that we cover are essentially provided over what I call a fat pipe, or a fibre connection into a building or a home, with increasingly fast broadband speeds, fingers crossed. On top of that, everything is really migrating to a bunch of applications. You can see that in your everyday lives with the shift from on-prem, and Microsoft 365, for example. The integration around those applications has accelerated the adoption of those applications. Obviously, that creates disruption, because it means that people who have legacy customers or technologies, they’re going to sort of churn or migrate.
But it also creates opportunities, and a lot of what we deal with are what I call mid-market companies. These are entrepreneur/ founder led businesses; they are a typically faster move, fleet of foot. They spot market opportunities, and they exploit them quickly. I fundamentally believe the UK has this very bright, vibrant, founder/ entrepreneur culture because these people are able to exploit these technologies, and rollout new business models. It’s been a pretty interesting year; not without its challenges, but I think what it has done has just demonstrated the underlying demand for all of the technology and the applications that we work with day by day.
If you look at the market, obviously there’s been a lot of change, there’s been a lot of impact to people, the way they work, social impact, as well as economic impact. What sort of impact has that had on businesses themselves and evaluations?
It’s not true to say that there hasn’t been any impact from the downturn. I think the last ONS figures were that the UK economy contracted by 8.5% last year, but they actually revised it down a little bit. But it’s still a scary number.
I’ve been working since the late 80s, and I’ve seen a few recessions and obviously nothing like this. So it would be really flippant to say that any B2B business, even if they’re in one of the fastest growing sectors, has not been affected in some way by that.
We do see some degradation and turnover, but typically the businesses that we deal with, they might be in telecoms or software, they have subscripted business models, largely where the customers pay by the month. They often deal with SMBs, and a lot of those SMBs have had furlough payments or assistance with rates or VAT or whatever it is. So we’re not seeing a big contraction in a customer basis of these businesses.
Now, that’s not to say there won’t be some impact moving forward. I think it is true that a lot of people in their models have put 2021 as the year of a big bounce, and then we’re all OK, which is a bit of a generalisation. But there has been to some extent something of that, and of course this lockdown looks like it will last until possibly the end of March. There is a double dip recession, that will have a bit more of an impact. For certain parts of the tech sector, that will obviously mean that the recovery has been a little bit delayed. But the flip side of that, of course, is that the adoption curve on new products has been much more rapid. What we are seeing is some very strong growth.
If you look at the revenue line, some legacy products and services might be declining a bit faster, but the new stuff is growing much more rapidly. That makes me pretty optimistic about the market moving forward, because what it’s really done is it’s just given a further push towards the transition; it’s effectively digital transformation and the move towards subscription. You put those two things together and obviously that will create a very big shift away from some probably quite large legacy corporates, who are just slower to move. They’ve got more internal issues to deal with, to companies that have largely new wave business models and can exploit that market transition more quickly.
Are you seeing things like CGT, that the government is talking about introducing in March, or things like Brexit, having an impact, which means that people are rushing to get deals done faster and sooner?
Yes, undoubtedly, and it was interesting last year, where we actually had one of the only deals in the first lockdown on the go, which was quite a large deal with a business called Glide, which was sold to a US infrastructure fund. That was a business that did broadband for universities, university accommodation and also business parks, etc.
Then there was a kind of lull over the summer, and everyone was kind of debating how rapidly the M&A market would recover in Q4. In fact, what happened was Q4 was incredibly busy, so there are an awful lot of businesses looking to sell, some of them founder owned, some of them not. But clearly CGT has been a factor.
There are a bunch of cell processes which are happening at the moment in the mid-market. The market we operate in is sort of £50 million to say £1 billion, but probably quite focused on £100 to £300 million enterprise value businesses, and we’re seeing a lot of activity in that market space.
Now, clearly, we don’t know what the Chancellor is going do, because we’re now in a new paradigm with a new lockdown. There’s a theory now that he won’t do anything with CGT because it’s just too early, and the economy is not yet in recovery mode. But, whatever the reality is, I think there are people who are still out there at the moment looking to sell before the 31st of March for sure.
How supportive have the debt and public equity markets been of M&A activity?
So I think it’s a really interesting question. The debt market closed up for a short while with the first lockdown, but has recovered and is very strong. I think the public market is very, very interesting because in my career, we’ve done a lot of public markets work, we do public to privates, we’ve done IPOs. The golden era for that was the mid-2000s period where we were very busy with floats. When you went to see a decent sized business, you put the options in front of them. And an IPO was always an option alongside private equity or trade.
Even when the public market recovered after the crash, which really happened in 2013/2014, the IPO market has never recovered to the extent it did previously. Frankly, we’d been taking more companies off the market. AIM companies, I think we did four in 2019, four take-privates.
We’ve actually seen a much more buoyant market for public offerings in the last six months, and certainly the brokers that we talked to (because if we float a business, we tend to partner with other brokers), they’re seeing some really good deal flow in that market space. I think what’s happened there really, if you look at it, the public markets recovered pretty rapidly after COVID and the FTSE 100 has actually been quite strong in the last few days. Obviously, the public markets in the States recovered even more quickly.
Again, big shift towards tech stocks and online stocks. Investors and public investors are still seeing big demand from punters like us, pension funds, etc, investing in the public market. Frankly, interest rates are so incredibly low, that the last place you want to put your money is just stick it in the bank.
I actually am quite buoyant around the prospect for public offerings, not the sort of £500 million to £2 billion type of public offerings, but actually, the old school IPOs that may be £100 to £200 million. I think that they’ve traditionally been seen as a bit small for the market, but actually, I think that there could be some real deal activity in that space. That’s really good to see because it creates another option for businesses as they review, whether private equity or trade is the right route to go down for an exit.
And what about things like carve outs? Do you think there’ll be a lot more carve outs where PE will get involved? Are you seeing that sort of trend occurring at all?
Well, I would say this being an M&A guy, that there is an M&A boom, and call it a bubble, but there clearly is a big drive towards M&A. In the large cap space, the stuff you read about in the business pages of the national press, clearly there has been an acceleration in very big deals. Let’s hope that isn’t the peak of a bull market.
There’s a bit of a herd mentality in the public markets where people decide now’s the time to do that merger that they’ve been thinking about for the last three or four years. I think what’s more interesting is, again going back to the low interest rate environment, it seems hard now to think that back in 2008/ 2007, interest rates were what 5%, 6-7%? We’ve been in an era where interest rates are below 1%, for a decade or more, and with COVID, etc, it’s pretty likely that interest rates will be very low for the foreseeable future.
So in that interest rate environment, what you saw since the previous financial crisis was that it fuels asset price inflation, because people can afford to borrow money. The value of property, the value of business assets went up and you saw multiples that might, 10 years ago have been 6x to 12x EBITDA. But I think what we’ll see now will be that there is still a significant amount of cash going into the market, and I think that will fuel a significant amount of M&A moving forward.
Inflexion bought a minority stake into Daisy. Do you think this is now going to be a trend that you’re going to see more and more PE companies putting cash in, sitting there waiting for the right time, increasing the stake?
That’s a really good question. It’s just been announced today by Inflexion, where we did a deal with a valuation of £1 billion pounds, which is a division of Daisy Group. Daisy Group is a company I’ve worked with since 2007/ 2008, with a fantastic founder called Matthew Riley, which I think people probably have heard of.
This business is called Digital Wholesale Solutions, DWS. It’s the part of Daisy that just deals with IT resellers. A very well-known business, quite a large business, but a good deal for everyone, including Inflexion.
I think the interesting thing is that minority capital is a reflection of the fact that not all founders want to lose control. Private equity need to look for more innovative and flexible ways to do deals, because the one-size-fits-all, we control the business now, mentality isn’t for all founders, isn’t for everyone. Inflexion have blazed a trail with that. The Inflexion Partnership Fund is really one of the first that has explicitly said, we will do really flexible deals to partner with founders, with shareholder rights, which reflect the fact that we aren’t in complete control.
I think you’re right, I think there will be more flexible capital available. I’m pretty optimistic, I don’t think that we’re at the peak of a kind of M&A boom or a bubble. I think when you go through disruption like COVID, and it accelerates technological change, then often what you see in these markets, having been a few downturns and upturns, is that you do see businesses reappraise their strategy. Say, ‘Why is it that this market is fragmented?’. If you take the IT market in the UK, ‘Why hasn’t it consolidated in the way that some other different industry verticals have?’
Years ago, there were multiple food retailers in the UK. Now, there are sort of four majors, for example. So I think some of that thinking is happening now, and that obviously will fuel deal flow in the marketplace, right across the market from small to large. That’s something where we’re going to take advantage of in our business, if we can.
Carve outs, going back to that question, do you see more of them occurring?
I mean, that is a good question. I think the answer is probably yes. Carve outs are usually driven by people saying ‘Look, we’ve got this division, it’s not really valued in the overall group valuation, and yet I can see over there that a business was just sold for 13x EBITDA. Why don’t we look at carving that business out?’
Or it’s an inbound, where someone says, ‘Look, would you sell us that business?’ Maybe private equity? PE love carve outs, they always have done. I think with markets where there’s tech transformation, and there’s more M&A. Frankly, it’s harder for private equity to find good deals; it’s a very competitive market in the UK, so I think it will fuel carve outs. There will be some really good deals done over the next 12 months, I’ve no doubt about that.
Chris, if you could talk freely, and off the record, to a business owner, what advice would you give them about how to get the most out of any M&A activity they were to get involved in?
Again, that’s a very good question. I think that if you’re a founder, if you’re an entrepreneur, you’ve got lots of motivation in your mind. I know this because we own our own businesses, right? So it’s not, as I often say to people, you don’t sort of get out of bed one day and say, ‘Right, I’m going in that direction and I know exactly where I’m going and my strategy is set for the next five years.’ Life isn’t like that.
Your strategy is all about things from your personal life, your exit horizon, how much money you want to make, all the way through to how do you see the industry and how you see your business exploiting the industry. That’s why you end up with certain individuals who are, what I call the real deal, who just absolutely go hell for leather to exploit a business and grow it, while others are more conservative, and that’s not a criticism of them.
I think that in terms of M&A, my advice to people would be, get an advisor on board. I would say that, but I think don’t ignore the possibility of transformational M&A. Lots of people do buy and builds and buy little businesses, but every so often there’s a deal to do where you merge with something or you can do something more ambitious. Don’t dismiss it or ignore it.
A founder once said to me of quite a large business, and it’s fair comment, he said: ‘Look, I’m not going to do that deal (the deal that we presented to him), because I know that the day after we close it, I’ll have a queue of people outside my door with problems.’
I’ve never forgotten it, and of course, it was perfectly true. The business he was buying was going to require a lot of hard work, and he didn’t want to be. It probably would have created lots of value, but this guy was close to 60, and he didn’t want to be sitting there with five massive issues to sort out that were going to take 18 months to two years to sort out.
But sometimes there is a deal, which will create huge amounts of value. I just think that bringing someone like us on board to just evaluate, as the next five years can take you in a completely different scale and direction, and see if it is the right thing to do. We love working on situations like that, we’ll even do it for a contingent fee!
Next question and probably the final question is, if you are looking ahead at the market, looking forward to 2022/ 2023: a world where Trump is no longer with us, the vaccine has been rolled out, and the economy is sort of starting to stabilise. What do you see as being the big trends in the tech market?
Yeah, another good question. The things that I don’t think make a lot of difference, as far as I can see, something like Brexit I don’t see as being a massive factor in the tech market, because a lot of trends are global, and a lot of technologies are global. I think that there are some big shifts in the markets we cover.
To give you one example, just the shift towards the investment in fibre, which is happening all around the world, all around Europe, the UK and Germany, is a massive shift. I often like to think, what will the world look like in five or ten years, and in ten years’ time, pretty much everyone in the UK will have a fibre connection, probably a gigabit to the home. That will mean that you can do even more domestically; we are all now committed streamers.
In the residential market, we are a transition away from analogue broadcasting, all that kind of stuff we know about well. In the business market, what that will fuel with, is the shift towards everything being an app.
I think the big question that mid-market players that we follow, need to ask themselves, what is the role of people like Microsoft or Google in these markets? And how do I add value in the B2B market?
Inevitably, there will be a bigger role for the likes of Microsoft in, for example, hosting with Microsoft Azure, or in telephony and conferencing with Microsoft Teams. I think those were a couple of big shifts.
Obviously, there are other massive shifts in terms of the move towards machine learning, automation, digital transformation. But it’s interesting, all of these things I’ve just said, are all heavily tech focused trends. For the 2 or 3 million small business customers in the UK who are going to exploit those trends, they create huge opportunities, so I think it will be a really interesting market.
Thank you very much, Chris.
Tech & Tech Enabled Practice