Integrated finance is the real deal for growing businesses

Published on Wednesday 18 October 2006 00:57

M&A activity in the UK is on track for a bumper year in 2006. In the first nine months of the year, 1,847 UK companies worth $172.8 billion (£93.15bn) were the target of takeover approaches, according to Thomson Financial.

Corporates and their shareholders are looking to acquisitions for growth, while private equity firms have raised record amounts of cash and new players such as hedge funds have entered the market.

In this competitive market, there is demand for new and innovative ways to do deals. At Bank of Scotland we have been a key provider of debt for private equity deals for more than 25 years. When we tested the water with our integrated finance offering in 2000, it represented a new approach to funding mid-market companies.

The bank's integrated finance is perhaps most famous for its funding of Philip Green's acquisition of Arcadia in 2002, where the unit provided the lending for Green to purchase 92 per cent of the company with the bank picking up the remaining 8 per cent stake.

Traditionally, however, integrated finance has focused on the small to mid-cap end of the market, with deals ranging from 20m to 150m. The active Scottish team recently provided a 10m debt and equity package for the secondary buy-out of Glasgow-based facilities management company Mono Global.

We back management teams but in a fundamentally different way from the private equity industry. If people come to us and we like what they say, they don't have to trawl around for capital. We provide it all.

Most private equity sponsors take the lion's share of the equity in any given deal, leaving management with around 25 per cent. Integrated finance, however, typically takes between 20 and 30 per cent, offering management the rest. We give management a disproportionate share of the equity. In the case of Mono Global, for instance, management has an 80 per cent stake. Each deal will include a certain amount of equity, structured as loan stock and carrying an annual yield, payable to the bank.

Our approach is different to private equity investors. We don't need to sell our stakes in companies within a two- to three-year time frame because we are not under pressure from external investors. Our management teams come to us when they think it's time to sell. We see ourselves as partners, not owners.

• Frank Summers is head of integrated finance at Bank of Scotland Corporate