Stories
When Anya Cummins moved back to Dublin in 2016, private equity wasn’t part of her plans.
Cummins, who returned to become a corporate finance partner with the professional services firm Deloitte, had spent the previous six years in London working on mid-market mergers and acquisitions. Private equity deals were a big part of that.
Cummins didn’t expect to use her private equity experience in Dublin because, at the time, there wasn’t much private equity in Dublin. “I didn’t come back expecting to build a private equity M&A business. I said goodbye to the worlds that I had lived in, which was pure mid-market PE,” Cummins said.
In 2016, in Dublin, Cummins was the right person in the right place at the right time. “When I came back from London in 2016, the market was so immature. There were a handful of private equity-backed businesses. Now we have hundreds,” she said,
“You had suddenly these teams of [private equity investors] based in Ireland, actively targeting the private market. And then you had lots of fundraisings in the UK. And funds were increasingly looking at the Irish market – it became a bit of a waterfall effect. And then, when a UK or international fund does one deal in Ireland, they will typically then be coming over for board meetings and have a reason to be here. And they start to infiltrate the market,” she added.
Now, she said, “I could genuinely meet six to nine private equity investors a day.”
Cummins missed the very earliest days of the PE industry in Ireland, after the Global Financial Crisis when PE firms bought distressed assets from the likes of AIB and the IBRC. The industry mushroomed thereafter. There was an average of 21 PE deals between 2010 and 2015; between 2016 and 2021, that number jumped to 38. The story is uniquely Irish. PE accounted for half of the value of deals in Ireland in the first half of 2021, compared to 18 per cent globally.
Irish PE is catching up to the rest of the developed world. That’s why it’s growing so quickly. Aside from the catch-up effect, the global industry has grown a lot in the last ten years. In 2021, PE firms controlled $4.7 billion of assets – that’s up 262 per cent in ten years.
But of course, the weather changed in 2022. The big publicly traded private equity firms like Apollo, Carlyle, KKR and Blackstone are down an average of 18 per cent in the last year.
Six years after returning home, Cummins is now a specialist in mergers and acquisitions here and is also head of Deloitte Private Ireland. In this interview, Cummins discusses:
Ireland’s changing attitude to debt
How private equity took root in Ireland
A big part of the rise of PE, said Cummins, was a cultural change: “You need success stories. You need owner-managers doing the private equity deal, it being a big success, then having the second bite of the cherry, as we call it, exiting again, maybe to private equity again, and doing really well. Driving around in their Maserati or whatever it is, and buying the fancy holiday home. Telling their colleagues in their networks that this was a really good thing to do.”
What about the buyers – why is there a deal to be done between private equity buyers and owner-managers? What’s in it for the funds?
The first point is that PE funds have a higher risk appetite. A company will only represent a small percentage of the value of a private equity fund. But for an owner-manager, a company will usually make up a huge percentage of their net worth.
This makes them more cautious, said Cummins: “The main thing is risk appetite. If you as a founder de-risk and take some capital off the table – which is typically what you do as part of a private equity transaction – you’ve secured your family, and your future, and all of your wealth is not tied up in the business. Your appetite as a founder or management team to run harder, do more, put debt into the business, and go more aggressively for growth can be different.”
Another opportunity for private equity funds is to pump more capital into the business. “You [as a company owner] are often bootstrapping the business for want of a better description. You’re cash funding all of your growth. Often you don’t have external funding or significant external funding lines. So your appetite for taking riskier decisions can be more muted. The question I hear managers often get asked is, ‘if we gave you €20 million, or €50 million or €100 million, how would you spend it?’ Which is alien to your typical privately-owned business,” according to Cummins.
The third opportunity for private equity funds is to beef up company management, said Cummins. “Lots of private equity investors will have been through very similar situations with very similar businesses. They will put non-execs on the board, chairs on the board help to supplement, if there are gaps in the management team,” he said.
The fourth opportunity for private equity is to consolidate a fractured industry. Where there’s an industry with lots of small players, selling an undifferentiated product, there’s an opportunity to combine them into bigger more efficient businesses. “One of the big features of private equity is buy and build,” said Cummins. “They’re often investing in businesses that we will call a platform company with a view to making acquisitions. And that is a core capability or strength of private equity funds.”
“If you think about private equity, they are typically trying to somewhere between double and triple the size of the business over a three to five-year period,” she added.
Private equity firms have a reputation for slashing costs, and often headcount, at target companies. But according to a 2020 survey from Bluewave, a PE advisory firm, 71 per cent of PE investment was directed towards growth, as opposed to cost-cutting. Cummins said cost-cutting has not been the strategy at Irish PE firms: “The big focus on all of those deals, is revenue synergies, what can you drive in terms of commissions and fees by bringing them together? And technology?
“Where you see cost synergies is if you’ve got a strategic buyer. So if you do a platform private equity deal, and then you’re going on to bolt-on acquisition, then you’re looking at revenue and cost synergies – typically integrating back office, integrating the supply chain. That can you get buying power, savings on raw materials, or whatever it might be, integrating finance functions. But often that means systems as opposed to people.”
Who’s doing the buying?
Though US PE firms are involved in the biggest deals, most firms come from the UK. “In the main, it has been UK [based capital] because of proximity,” said Cummins. “It’s a proven model in the UK that they then look to replicate in the Irish market Things like it managed services or insurance brokers or some areas of healthcare. That’s all been done in the UK, but 5-10 years ago. It was a rinse and repeat for want of a better description.
“Ireland has the same language, it’s easy to jump on a plane and fly over… Ireland is seen as an easy stepping stone. Very nice, but they also like to come and visit. There are also lots of Irish people dotted around UK private equity funds,” she added.
Something Thomas touched on in his excellent column last week was the increasing specialisation of international investment. It’s something we’re seeing in forestry investment and also in private equity.
Where in 2010, private equity investment was one-size fits all, now specialised funds are targeting specific industries and specific parts of companies’ capital stack.
“We’re seeing a wider pool of alternative forms of private capital. So you’ve got your pure private equity, which will do majority funds. Then you’ve got specialist minority funds. Specialist growth capital funds. Infrastructure funds becoming more dominant. Sovereign wealth. And then you move into debt, but the alternative forms of capital which have become more specialised in themselves, and the blurring of the lines, in some ways, between them,” Cummins said.
“It’s more complicated for owner-managers, but there’s way more choice than there used to be in terms of – what is the type of investment I want? What does it come with in terms of structures and protections? What value does it bring? What is the hold period? What’s the ultimate exit game? There’s loads of optionality now for founders in terms of what’s the right form of capital,” she added.
People (and spreadsheets)
One might expect a corporate finance partner at Deloitte to be, first and foremost, a numbers person. “I remember my first week in Deloitte, we did one of those personality tests on introverted vs extroverted, and I think I almost broke the extrovert scale. I’m a total people person. And so what I love is engaging with people, both team and clients. It’s just so diverse. You’re meeting different people, different sectors every day of the week. Just keeps it just super interesting,” she said.
“I love my job because I love people. The emotional rollercoaster that you go on, particularly if it’s a family business. And people can find it really difficult. Especially if [a sale process] goes on for a really long time.”
If you think of a company owner deciding to sell their business, it’s something they’ll typically have no experience in. It’s a difficult and stressful process. And the stakes couldn’t be higher. So Cummins’ relationship with her clients is an intimate one. It’s the same with the buyers – relationships are very important to the success of a deal: “Some of these buyers are going to come in, join a seller’s board, and they spend an awful lot of time with them. Sometimes it’s like getting married. A seller is going to spend an awful lot of time with this investor. So choosing them carefully, and also structuring it carefully.”
Ireland’s changing attitude to debt
Looking at the global PE industry, about 70 per cent of the time, PE firms add debt to target companies. That’s according to a study by Verdad’s Dan Rasmussen. Usually they double existing debt, according to Rasmussen. Specifically, PE firms borrow money to buy a company and then, having acquired the company, move the debt onto its balance sheet.
Irish firms are notably stingy with debt. When I looked at the balance sheets of big Irish firms last summer, I found they used much less debt than peer firms in their industries. Cummins said it’s coming in part from the company side, rather than the lenders: “If you’ve never had debt in your business before, going to four or five times debt at 7 or 8 per cent can feel like quite a jump or quite a leap of faith.”
“[Irish companies] tend to be less aggressive in terms of leverage. A lot of the deals that we would see would be two or three times [debt as a multiple of Ebitda] leverage. But that is starting to shift, which is coming more from the founders slash borrowers side, and their appetite for risk,” she added.
“As the business gets bigger, and the finance function gets more sophisticated, and you get CFOs who have been through it before, you will tend to see businesses getting more comfortable with a higher level of debt. So I think that’s going to change over time.
Ireland in 2023
Ireland’s private equity boom has been, in part, about catching up with the UK and the rest of Europe. But what about the last year, when the mood music abruptly changed?
“I’d say we’ve got more tailwinds than headwinds going into this year,” said Cummins. “We had such a busy year last year, despite massive challenges with debt, economic disruption and cost inflation. You would think the market might have been quieter. But it was our busiest year ever.”
“I think Ireland is in a really good place. And when you look at reports this morning on last quarter’s growth projections for growth, it’s an attractive home for capital,” she added.
What indigenous Irish sectors are strong? “We’ve got a really interesting FDI sector. So when you look at the prevalence of MedTech, pharma, and tech in Dublin, and across Ireland, I think there’s a really interesting services business, which has built up around that. So there are lots of interesting businesses that are providing a whole range of services from regulatory compliance, product development, marketing, automation into those sectors.”
And what industry does she expect to see more of in the next year? “Private health care is going to be a really busy space. We look across the Irish funds, and they have invested really heavily into Irish healthcare. In the UK and Europe, one of the biggest themes has been the roll-up of professional services firms, including accountancy firms. The office of the CFO is another big theme. What do CFOs need for scaling businesses? In particular, the outsourcing of accounting and payroll. There has been a load of payroll software deals, tax compliance. And that links to the technology piece.”
That’s not to say the changing environment hasn’t had an impact, said Cummins. The risk appetite has reduced. “[Private equity] would rather pay the premium valuation for the A-plus businesses. Whereas the B-minus businesses are probably being over-impacted. So they will see the full impact. And maybe a bit more on new deals. And the C-minus businesses are non-tradable. We would describe it as a flight to quality. Quality businesses are not seeing the same extent of the valuation impact. Any hair on it, and you’re in trouble.”
