Green energy and tech deals have been driving the mergers and acquisitions market in Scotland as the secondary market in renewables gains traction and technology start-ups are recognised for their value to financial institutions.
In May, Glasgow’s Asura Financial Technologies secured a six-figure investment deal to fuel growth.
The firm, which develops software for stockbrokers and wealth managers, was the first to be awarded funding with the help of a scheme from Glasgow City Council to help small and medium-sized enterprises grow.
“Everyone is interested in tech start-ups at the moment, although rather than M&A deals it’s investment deals in that field,” says Chris Smith, lead partner in the corporate department at Gillespie Macandrew. “Everyone is looking for the next unicorn.
“Tech start-ups are attractive because they offer the prospect of potentially very good returns – certainly returns that are better than interest rates now, although that may change in the near future.”
Smith says investment in tech start-ups tends to come from private equity funds and private investors, as well as people looking for tax benefits.
“The traditional lenders are now interested in a way they weren’t before, but our experience is that they are very risk-averse,” says Smith, adding: “They are not that interested in start-ups.
“We have had clients in talks with the banks that ended up not going anywhere because the banks are not interested in anything that’s not completely solid.”
The corporate team at Wright, Johnston & Mackenzie (WJM) has also been involved in the tech sector.
“Particularly in Edinburgh, there has been quite a lot of activity funding university spin-out companies, tech companies,” says WJM’s head of corporate Ken Long. “One of our clients, the investment syndicate Equity Gap, has invested in a fintech, LendingCrowd, which is a reasonably new company and it attracted quite a bit of investment.
“A lot of the tech investments that we see are in software or engineering.
“Stand-out investments have been in Vert Rotors, which was made by Equity Gap in the main. Vert [which produces innovative miniature low-vibration compressors] is a very interesting company with very interesting technology.”
WJM was also involved in the sale of Scottish laser supplier Compound Semiconductor Technologies to the Swedish firm Sivers IMA Holdings in April.
Despite the cuts to subsidies for renewables, the market there remains active, particularly around onshore wind farms and hydro projects.
“As a firm that is strong in land generally, one thing that we are seeing is the development of the secondary market in renewables,” says Smith.
“In past years, a lot of our work has been involved in setting up renewables joint-venture projects for developers and landowners.
“At the time, parties investing in those projects were looking ahead to a time when they would become tradeable assets.”
With that secondary market now developing, Gillespie Macandrew is working with one client on buying a wind farm that is already up and running, and another that is planning to sell. “It’s harder to get renewables projects off the ground now that the incentives have been scaled back, so the ones that are up and running and have had the benefits of incentives are quite attractive prospects,” says Smith.
Long points to packaging as a sector with a bright future, highlighting London Stock Exchange-listed Macfarlane Group, which completed the acquisition of Nottingham’s Greenwood Stock Boxes in September for more than £13 million, with a further £3m paid if certain trading targets are met in the next 12 months.
“Macfarlane have completed seven acquisitions since 2014,” says Long, who headed up the Greenwood deal. “I think the packaging sector is interesting at the moment because of the rise of Amazon and online shopping.
“The suppliers to that sector hopefully will be well positioned.”
Inward investment is emerging as a theme, with the value of the pound post-Brexit making the UK an increasingly attractive place for investors to expand their portfolios.
“During a two-month period alone this year, Brodies advised on deals involving counterparties and/or clients in Denmark, Israel, China, South Africa and the US,” says Shuna Stirling, head of corporate and partner at Brodies.
“However, from an international standpoint, it’s not all inward investment that is keeping us busy – we have also been helping clients looking to internationalise their business and enter new markets.
“The international work sometimes involves general advice, sometimes M&A activity, or often it can be private equity-driven.
“Private equity still has money to spend on the right transactions.”
Brodies advised on Abellio’s sale of part of its interest in the East Anglia rail franchise to Japanese trading house Mitsui this year, which is a prime example of UK infrastructure involving two international parties.
Stirling says statistics would seem to suggest a slowdown in some of the smaller deals, while the mid-market has maintained pace.
“There have also been some very large transactions,” she says. “In Scotland I would say that the market has been fairly resilient at all levels.”
Political uncertainty has a lot to answer for in terms of investors pressing pause, but Smith says: “Business goes on, life goes on and people still do deals.
“We act for a lot of family businesses and high-net-worth individuals and often the corporate M&A work we do is driven by personal considerations.
“It might be that someone coming up to retirement needs to find an exit for their business. I think we will continue to see more innovative ways of exiting a business.”
Rather than the traditional trade sale to a competitor or to a larger business that is looking to add to its portfolio, Smith predicts sales to employees will become an increasingly attractive way to exit.
“That has an appeal for the man who has his own name above the factory door because it often means that the name isn’t lost,” he explains.
“When the banks aren’t throwing money at any and all corporate M&A deals in the way that they used to, the market adapts and finds other ways of greasing the wheels.
“M&A deals happen for various reasons and they need to happen despite the market.”
The north-east has been a talking point since crude oil prices began to fall in September 2014 but Stirling says she has noticed a change in direction there.
“It is no secret that they have suffered in terms of the falling price of oil. However, there appears to be a growing return of confidence to the marketplace, which has been accompanied by a pick-up in activity.
“We believe that, if this continues, we may see more in the way of private equity exits in Aberdeen.
“The transactional market appears to be heating up, so watch this space.”
Looking to the year ahead, there is a mutual feeling that what comes next will depend on the outcome of the Brexit negotiations.
“At the moment the three areas I’m keeping an eye on are inward investment, private equity buyouts and exits, and Aberdeen and the north-east in general,” says Stirling.
“I think we will continue to have a resilient domestic market and interest from, and in, the international sphere.”
Briefing: Renewables, by Andy McFarlane
In a transitional year for the industry, WJM’s renewables team has had a very successful year, completing some of the largest single project transactions the firm has undertaken, involving property, planning, corporate and tax expertise from across our energy team.
Both transactions were onshore wind projects with individual complexities. Both required extensive private wire connections and had to be delivered within critical timescales.
In the case of Freasdail wind farm in Argyll, the challenges were to finalise the development to be Renewables Obligation Certificate compliant, complete the financing ahead of the European Union referendum and conclude a sale before the client’s year end.
For Bad a Cheo in Caithness, documentation had to be in place to comply with contract for difference deadlines.
We also completed the first commercial sale of a battery storage facility project in Scotland and were delighted to be instructed on a new generation of wind farm in Fort Augustus, which we hope will be developed to power the local aluminium smelter.
Renewables is a sector in transition but we remain convinced it will be a key pillar of the Scottish economy for decades to come and we look forward to working with our clients on many more exciting projects.
Andy McFarlane Partner and head of the renewables team, Wright, Johnston & Mackenzie
This article appeared in the Scotsman’s annual legal review 2017
The Scotsman’s annual legal review looks at some of the most active areas of legal practice in Scotland. Informed by comprehensive data published by Chambers and Partners and Legal 500, the articles give exclusive insight into the work of more than 11,000 practising solicitors and over 460 practising advocates.