The investment bankers at Investec Bank believe that cross-border proficiency will become increasingly indispensable to merger and acquisition (M&A) advice. The bank’s acquisition of a majority stake in European M&A boutique Capitalmind should extend its capabilities in that department.
Investec, which is listed in both London and Johannesburg, provides investment banking, private banking and wealth management services. Its investment banking arm offers the full bulge-bracket range of services to mid-market corporate clients who, it says, would otherwise have to get them from multiple sources.
With roots in South Africa, it has grown by acquisition in London over the past 30 years and now has a presence in India. Charles Barlow, Investec’s head of strategy execution and responsible for the bank’s cross-border M&A activities, explains recent thinking.
“Almost all M&A has some international angle,” Mr Barlow points out. “So, it’s important to demonstrate access to buyers and sellers around the world. When I took on the running of the cross-border business, we had two major gaps – continental Europe and the US.”
Partnering for growth
As part of its solution, in late 2018 Investec established a partnership with Capitalmind, an advisory-only alliance of M&A practices in Germany, France, the Benelux countries, Switzerland and, via a franchise agreement, Scandinavia.
In 2020, the bank set up a similar partnership with Regions Securities, a multi-disciplinary investment bank based in Charlotte, North Carolina. The co-operation agreement covers the whole of the US. It also has a relationship with Ad Astra Corporate Advisory, an independent Australian M&A boutique that was part of the group until Investec decided to exit Australia at the end of 2020.
The relationship with Capitalmind continued to grow and, in mid-2021, Investec acquired a 30% stake in the European practice. In June this year, it announced that this had been increased to 60%.
Lots of other firms are very siloed and their incentives to co-operate are less clear
The structure of the deal brings together the 15 equity partners in Capitalmind as shareholders not just in their own businesses, but in each other’s businesses. “That has created more motivation for them to work together,” says Jonathan Arrowsmith, Investec’s head of investment banking and of M&A.
“Lots of other firms are very siloed and their incentives to co-operate are less clear,” Mr Arrowsmith says. He adds that, where Investec once had 45 people working in M&A, it now has more than 135. “If you include South Africa and India, the numbers are approaching 200,” he adds.
Capitalmind will now trade as Capitalmind Investec. Its new chairman is Mr Barlow, who believes that combining these practices across Europe’s major economies will help Investec to grow not only its advisory business, but also its broader range of client solutions.
“On any individual mandate to sell a business, Capitalmind can help us to identify potential buyers in their locations,” explains Mr Barlow. “That in turn will demonstrate that we have access to buyers.”
Cross-border activity
While the new arrangement strengthens Investec’s cross-border abilities, the bank is no stranger to deals spanning more than one location. Mr Barlow reckons that his team has advised on around 30 cross-border transactions in the past five years.
Some of these had an Indian dimension. Last year, Investec India advised India’s Safex Chemicals on its £73m purchase of UK-based Briar Chemicals. This was the first foreign acquisition for Safex, a fast-growing agrochemicals business backed by ChrysCapital, one of India’s largest private equity houses. Investec had advised both Safex and ChrysCapital on previous occasions.
Investec’s London M&A team knew of Norwich-based Briar, the UK’s leading agrochemical contract developer and manufacturing organisation, and suggested the deal. Briar was previously owned by Germany’s Aurelius Equity Opportunities, which was ready to exit.
Briar’s CEO observed at the time that Safex was a natural home for the company. “This was an example of how synergy can be achieved by cross-border collaboration,” Mr Barlow says.
Restructuring prowess
It is not only M&A that can benefit from an adviser’s cross-border capacity. Investec was financial adviser and sponsor to Capital & Regional (C&R) on a capital raising in both London and Johannesburg. C&R, which is listed on both markets, is a UK retail property real estate investment trust (REIT) that specialises in shopping centres.
Its majority shareholder is Growthpoint Properties, the largest South African primary REIT listed on the Johannesburg Stock Exchange (JSE), with assets in South Africa, eastern Europe, Australia and the UK.
It was a very interesting deal, which required a lot of creativity
Investec’s mandate was multi-faceted and included the restructuring of C&R’s balance sheet. “It was a very interesting deal, which required a lot of creativity,” Mr Barlow notes.
The restructuring involved the refinancing of £372.5m of debt. It included a £165m loan from the Teachers Insurance and Annuity Association of America (TIAA) and the purchase of £100m of debt from NatWest at a £19m discount. Then £35m of the former NatWest debt was sold on to TIAA, increasing its loan to £200m. The package was buttressed by a £30m open offer on the London Stock Exchange (LSE) and JSE, fully underwritten by Growthpoint.
Investec was exclusive sell-side financial adviser to South Africa’s PayProp on its sale of a majority stake to US private equity house Accel-KKR. The terms were undisclosed. PayProp is an automated payment and reconciliation platform specifically for the lettings industry, with customers in South Africa, the UK, Canada and the US. Accel-KKR targets the software and technology sectors.
“Completing this deal meant managing a complex multi-jurisdictional restructure,” Mr Barlow explains. “There was a concurrent carve-out of a separate division within the group, and engagement across a diverse set of institutional, family office and high-net-worth shareholders.”
Investec was also exclusive financial adviser to Incubeta when it sold a majority stake in itself to US private equity investor Carlyle last year. Again, terms were not disclosed.
Incubeta, set up in Cape Town, is now an international leader in digital marketing, with clients in more than 20 countries and 800 employees worldwide. Investec has been a long-term adviser to the business, whose international growth plan will now be supported by Carlyle Europe Technology Partners.
On the cards
The M&A team has advised on deals worth £16bn over the past five years, Investec says. That figure should leap by some margin if and when the sale of Dechra Pharmaceuticals to EQT is approved by shareholders.
Dechra, which makes veterinary pharmaceuticals for the international market, was worth £60m when it floated on the LSE in 2000. It entered the FTSE 100 Index last year and now Swedish private equity house EQT has agreed to pay around £4.5bn to acquire the business.
Investec was sole financial adviser to Dechra, which has been its client since 2009. It has advised on several fund raisings, the most recent being in autumn 2022. Previously, it advised on the acquisition of two Dutch veterinary pharmaceutical businesses — AST Farma and Le Vet, both in 2018. “This would be the largest take-private on the market this year and the largest since 2021,” Mr Arrowsmith says of the EQT deal.
He notes that underlying economic conditions and significant inflation have destabilised share prices for many assets, reducing confidence. “So, M&A, even in the middle market, has been subdued,” he says. Mr Arrowsmith does, however, expect the next 12 months to be busier than the previous 12 months, without returning to the record-breaking performance of 2021.
A pronounced repricing in the cost of debt has limited the scope for manoeuvre of private equity, an important driver in this market. Some are even predicting that the golden age of private equity has ended.
Nonetheless, as Mr Barlow emphasises, the middle market consistently accounts for a significant share of total M&A, not far short of 50% by value. “The middle market is so big that, even in a downturn, if its growth strategy is in the right areas, an adviser can still grow,” he says. “That’s because there is so much resilience in the market.”
