Expertly Put is a series of exclusive conversations with industry experts, designed to help business owners and management teams gain a deeper understanding of the topics that matter most. In this two-part interview, Stuart Fitzgerald sat down with Mark Flood, Director of Renatus to talk Private Equity.

I’m still trapped in the Renatus Living Room. Mark Flood is in full flow, waxing lyrical about private equity’s positive impact on ambitious companies. A more generous interviewer might call it stream of consciousness. Behind him on the bookshelf I spot the Jim Collins book Good to Great. Mark is a man who likes to provide his own metaphors and I’m reliably informed that the book inspired the Renatus logo.

I move the conversation towards the macro environment.

Stuart Fitzgerald: There are a number of active international PE players in Ireland at the moment. What impact have they had on the market?

Mark Flood: They’re all part of a healthy funding ecosystem. The presence of international PE in Ireland sends a strong signal about the maturation and stage of development of Ireland Inc.

SF: Is there a benefit in choosing local PE over, say, a London based fund. Or vice-versa?

MF: You could debate that over and back all day but, in the end, it comes down to fit. Assuming the deal economics are market, the big question to ask is what value can a funding partner bring to the table over and above the cheque? What’s the chemistry like? For some companies partnering with UK PE makes sense, for others having a local partner who understands the Irish market works better. Remember that this could be a 5-8 year marriage. You need to be sure that whoever you shake hands with is going to be at the wheel for the full journey. We have seen turnover of senior people in some PE firms.

SF: All of this available capital must have an impact on deal making. ⁠What’s your view of the macro environment? Is it a good time to do deals?

MF: The macro environment is solid. The Renatus house view, which is shared by most market watchers, is that the UK consumer is fragile. We might be starting the see the early signs of softening consumer sentiment in Ireland, too. So, it might not be the time to place any large consumer bets. B2B looks relatively solid, but everything is impacted by consumer sentiment to one degree or another. From a funding perspective I wouldn’t be taking on a huge amount of leverage at the moment. We just don’t know what’s out there from a geopolitical perspective. That’s the Renatus view, but if we knew exactly what was going to happen, we wouldn’t be getting up at 5am every Sunday morning to write a newsletter!

SF: The leverage piece is interesting. Particularly where most commentators expect ECB rate cuts in the second half of this year. It is possible to get deals completed without any external equity, so, why ⁠why would a business owner or MBO team choose PE over another option such as uni-tranche debt?

MF: I can see why a 100% debt funded deal might look attractive, but as Warren Buffett once said; “debt is like a dagger at the steering wheel, it will keep you honest while you’re driving but could kill you if you hit a bump.” If and when you hit that bump, you’ll find out if you are truly aligned with your funding partner. If there is too much leverage in the business the situation might become difficult. The owner of the debt will want their money back. That’s their model. If the repayment capacity becomes very tight, covenants might be called in, which is a position no management team wants to find themselves in. On the other hand, if your equity is hip to hip aligned and something goes wrong in the short-term the sensible solution is to double down. When you’re 100% aligned and there’s trust on both sides of the table, most macro-emergencies can be managed.

SF: Coming back to the cost of capital, ⁠what impact have interest rates increases had on deals and valuations?

MF: Trading businesses are more nuanced than other asset classes like property. With property it’s binary. Thirty-six months ago, a property with a €10m annual rent roll might have been worth €200m, if a foreign owner was happy to take a 5% yield. Say that foreign owner is American, they have experienced eleven Fed interest rate hikes since 2022. Their cost of capital, before lender margin, has gone from close to 0% to +5%. The target yield might therefore need to become 10%. At the same rent-roll the property is now only worth €100m. It’s an extreme example but you get the point.

SF: I do. The impact on the enterprise valuations of trading businesses hasn’t been as dramatic, but the same broad principles apply.

MF: Yes, they do. There’s more subtlety involved but the fundamentals are the same. Debt costs more so there’s now less cash available after debt-servicing. Ultimately that impacts the total return.

SF: The other factor to consider is improvements in the risk-free rate; bonds, money market funds etc.

MF: Agreed. If an investor can earn 5% on deposit today versus 0% thirty-six months ago, that has to be reflected in their valuation on the way in, to offset the new risk profile. Ultimately, it comes down to opportunity cost.

SF: But it’s not as formulaic as something like property.

MF: It can’t be. In a property investment the cash-flow is highly predictable, assuming the tenant’s covenant and the lease are strong. A trading business is very dynamic. You could experience exponential growth in earnings and enterprise valuations if you back the right team and the right business. With that said, macro-developments have certainly put manners on the market. There isn’t as much mad stuff going on. There are more bilateral deals. Ultimately, vendors are more realistic when they come to the market. The crazy multiples from a couple of years ago aren’t there as a benchmark anymore. Vendors tend to have realistic valuation ranges in mind. If an offer falls within that range they are generally willing to strike a deal.

SF: We’ve covered a lot of ground. Any final thoughts to share with Irish SME owners and would be MBO teams?

MF: Get a good advisor like Fitzgerald Power.

SF: You had to say that. I bought lunch.

MF: True.

Renatus is private equity firm based in Dublin. Founded by Mark Flood and Brendan Traynor, the firm has made ten investments in high-growth, entrepreneur led businesses. In June 2023 they exited their first investment, selling Boojum to the Azzurri Group.

See Part 1 of the interview here.

Until next time.

Expertly Put is a series of exclusive conversations with industry experts, designed to help business owners and management teams gain a deeper understanding of the topics that matter most.