Scots confidence up for a new year of opportunities

Published on Wednesday 18 October 2006 00:57

DEALMAKERS in Scotland have enjoyed a busy year, but as 2006 draws to a close the question being posed is: will this buoyancy continue in 2007?

There is no doubt that a benign economy with relatively low inflation and interest rates has produced an environment conducive to the flow of deals. While there is no evidence to suggest this environment is under threat, dealmakers will be first and foremost keeping a close eye on the Bank of England's interest rate policy.

In August, the bank increased rates for the first time in two years to 4.75 per cent from 4.5 per cent. Some analysts say another rise, to 5 per cent, is needed to keep inflation in check. The prospect of this is already causing jitters in some quarters.

Wobbling consumer confidence is another potential cause for concern. As Torquil Macnaughton, director of Glasgow-based Penta Capital private equity, says: "The death of consumer confidence has been mooted for some time. But there's a lot of debt out there. Rates of, say, 6 per cent would definitely have an impact."

Jack Ogston, head of acquisition finance in Scotland at Clydesdale Bank, says: "Whilst an unforeseeable event such as a terror attack could impact adversely on economic conditions, overall our level of confidence for 2007 remains very high on the back of a significant number of completions in 2006 to date."

Political change is also on the cards next year both at national level, with Tony Blair bowing out as Prime Minister, and at regional level, with local and parliamentary elections scheduled in Scotland. But again, this is unlikely to alter the landscape dramatically.

Barclays Bank is also expecting a similar amount of activity in 2007 compared with 2006. Ally Scott, head of the bank's leveraged finance unit in Scotland, says: "We will still see the weight of private equity money looking for a home."

This will maintain the favourable conditions for vendors selling businesses; as well as private equity cash swilling around, the debt markets also remain highly competitive.

The favourable conditions in Scotland are also helped by the fact no dominant player has emerged among the private equity groups. This, coupled with the general liquidity of the market, means Scotland remains, for now, a very open and attractive place for doing corporate deals.

Mike Polson, head of the corporate team at law firm Dundas & Wilson, predicts that the mood in 2007 will be a little more cautious than it was in the first half of this year.

He says it is becoming increasingly difficult for fund managers to find good opportunities at the right price. There is a mismatch between the price they must pay and the return they expect on the investment, he says. Polson adds: "Fund managers are being very careful not to make mistakes as it can be very difficult to recover if you slip up early on."

The frothiest sector for deals in Scotland this year has been oil and gas. And it is expected that this sector will see plenty of activity next year.

Macnaughton at Penta Capital says: "As long as there is a stable oil price of above $50 per barrel the market in Aberdeen remains a good area to look at. There are a lot of spin-offs up there. I'd be surprised if there was less activity than this year."