While the definition of “mid-market” varies among market participants – from companies of £50m ($82m) to more than £1bn – it is getting attention for the fees these businesses could generate as they grow.
“[The] preference for most advisers is to get to know companies earlier in their life cycles rather than simply jumping on the bandwagon as momentum builds,” says Matthew Judge, director of technology corporate finance at Evolution Securities, the investment bank.
Jon Hughes, who leads the transaction business of Ernst & Young, the professional services group, in the UK, says in order to win mandates in the mid-market it is becoming increasingly important to demonstrate deep sector expertise.
“Cost remains important to clients when seeking advisers, and there are advisers out there that have had to buy work to keep their people busy,” says Mr Hughes. “But most buyers realise that ‘cheap and cheerful’ isn’t the way to go, and are instead looking for an adviser to add value.”
Some bankers believe advising mid-caps versus large caps differs because in a smaller company the shareholder base is more concentrated and management itself is often a material shareholder. Advisers point to the recent battle for Mouchel, the business services group, as an illustration of the importance that a small number of shareholders can have for the outcome of a deal.
Unlike larger companies that often have in-house M&A specialists, advisers say many mid-cap companies lack the necessary expertise to deal with the demands of being a public company. “Non-executive directors strengthen the team considerably, but advisers bring real current knowledge of the rules and regulations, which can be invaluable – they are perhaps much more integral to the process,” says Mr Judge.
The landscape, advisers say, is very competitive. But the crisis has helped reduce the field. “There seem to be fewer players – most advisory firms have slimmed down,” says Howard Leigh, senior partner at Cavendish Corporate Finance.
Darryl Eales, chief executive of LDC, the private equity fund that is part of Lloyds Banking Group, believes the dominance of the big four accountancy firms has been reduced.
“There is a greater number of independent boutiques, which have become more proactive,” says Mr Eales, who adds that they are more focused on delivery of value from advisers. “In a typical transaction, we give advisers a base-level fee of 1 per cent of the deal value but then give them an aggressive mechanism, which allows them to earn a higher fee if they help us exit above an agreed level. This gives advisers a strong incentive to deliver above the price we are expecting.”
However, M&A volumes remain low and bankers say competition has been increasing from the larger investment banks for business with smaller companies. “When markets and M&A are down, two new entrants come into the middle-market advisory community: the investment banks lower their bar in order to grab revenue, and a new wave of boutiques [often set up by bankers seeking new challenges in the downturn] also joins the fray,” says David McCorquodale, corporate finance partner at KPMG, the professional services group.
He adds: “As markets pick up, the investment banks chase the larger fish and only the very best boutiques survive. Clients usually demand long-term relationships and want to know that their advisers will be there with them through thick and thin.”
Some of the new boutiques recently set up include Smith Square Partners and Qatalyst.
The result, say advisers, is increased pressure on fees. “Corporate clients’ readiness to pay fees will depend on the quality of advice and service they receive,” says Etienne Bottari, head of corporate finance at Numis, the UK broker. “Corporates are giving greater credence to trusted relationships; they are selective about the deals they wish to pursue and want high-quality advice to ensure shareholder support. This requires an adviser with a strong knowledge and understanding of the company and its strategy, as well as of the mid-market institutional investor base.”
But there are still good reasons for advisers to want to assist mid-cap companies, despite falling fees. “Mid-cap companies are more likely to be doing deals of relatively significant scale [relative to their market capitalisation] and thus require external debt or equity funding – where the ability to earn fees grows,” says David Currie, head of investment banking at Investec.
“There is some pressure on fees, but the segment has other rewards from an adviser’s point of view – the nature of the relationship with top management, and the greater traction of the advice itself,” says David Clasen, executive director at Clasen+Co, the boutique advisory firm. “The mid-market is more ready to accept advisers without a balance sheet. This makes for a stronger relationship with the client, based on quality of ideas and advice rather than as an add-on to skinny loan margins from a reluctant credit committee.”
Advisers say the relationships between mid-cap companies and their advisers tend to be closer.
“Clients in the mid-market tend to look for a relationship-based approach with their corporate finance and broker advisers, and will turn to those trusted relationships in an M&A transaction in view of their strong knowledge of the company and the shareholder base,” says Mr Bottari of Numis. “In large-cap transactions, M&A advisers can often be brought in on a transaction basis only.”
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