Doug Crawford: Good investment in times of crisis

For years, anecdotes about a “wall” of money being available for investment in good-quality businesses were common – and this was reflected by Scotland’s deal flow, especially in the north-east. Private equity houses vied with corporate buyers for the best dealmaking opportunities, and few auctions would run without national or international investment interest.

Doug Crawford

Has that changed as a result of Covid-19 and climate change commitments? Almost certainly.

Investing during a pandemic brings challenges and, as well as conducting the usual diligence, investors need to identify which sectors will emerge strongly and which businesses will flourish.

The viability of investors’ current portfolios have also come under careful scrutiny. Pre-pandemic, certain sectors and firms would have required investors’ attention, but now the majority of investments will have been impacted to some extent, and bandwidth to consider new investment opportunities is limited as investors focus on their existing positions.

However, the “use it or lose it” mantra remains constant. Generally, investors have a set period to invest funds raised and –pandemic or no pandemic –
they are incentivised to use these and make investments within the original timescales. If monies are uninvested and returned to clients, the chances of raising further funds are limited. Accordingly, investors remain keen to invest in good-quality Scottish businesses, provided they remain strong post-Covid-19.

Businesses involving hydrocarbons face a different, fast-changing landscape. Corporate buyers still have an appetite to transact in those markets, to gain critical mass, acquire technology, advance their ESG [environmental, social and governance] credentials, or because a target business is a good fit – but investors have to comply with their own financial backers’ investment parameters.

Those backers are now universally interested in ESG credentials, and while some appetite still remains for oil and gas-focused businesses, it is already limited and becoming more so as the climate change movement progresses.

The volatility of the oil price is also a factor that may dissuade generalist investors from dipping their toes into the market, as well as dwindling oil and gas industry expertise in the investor base.

However, when is an oil and gas business not an oil and gas business? Do those involved in decommissioning fall into that category? What about those supplying services to the petrochemicals sector? Or oilfield service businesses that are partly transitioning into renewables?

While there are fewer investors who will consider pure oil and gas plays, appetite should be strong for firms that can demonstrate transition or otherwise satisfy credit committee and funders’ ESG requirements.

As many businesses transition or diversify in an ESG-friendly way, it is likely that investor appetite will rebound. For the north-east and its world-class energy service companies, that should be welcome news.

Doug Crawford is a corporate partner at Brodies LLP, based in the firm’s Aberdeen office