Funding growth in a difficult environment

Growth is still on the agenda for many businesses but financing it has become more challenging as a result of rising interest rates, spiralling costs, and the global economic slowdown. “The challenges facing Irish businesses are well documented,” says Brendan O’Brien, partner and head of the corporate law group at Walkers Ireland.

“Inflation, climbing interest rates, coupled with rising energy prices and labour costs have put many businesses under enormous pressure,” he continues. “Access to funding is essential for businesses to grow but in the current economic environment it is also essential to survive.”

The best form of funding for a business will depend on several factors, such as the prevailing economic conditions, the stage in the business’s life cycle and its existing capital structure, O’Brien explains. “The key question for any business looking to raise capital will be to decide between debt financing or equity financing or a combination of both.

“In essence, equity financing carries no repayment obligation, provides extra working capital to help grow a business and often introduces external expertise to the management team. Debt financing, on the other hand, allows the shareholders to retain ownership of the business.”

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Getting hold of either is becoming more difficult, according to David O’Kelly, head of M&A at KPMG. “The changes in the macroeconomic environment during 2022 have resulted in funders seeking greater comfort about the resilience of the applicant’s business model,” he says. “It’s important that businesses can demonstrate how they’ll navigate higher costs including bank interest, staff costs and general inflation if they’re to successfully access finance.”

Fortunately, there are multiple options out there. “In recent times the debt market has expanded with greater availability of products such as asset-backed lending that can provide flexible finance as a company grows,” says O’Kelly.

“The growth in alternative lenders has also introduced more flexible funders who may have a higher risk appetite. The equity options available to companies have also increased with significant growth in the number of private equity funds with boots on the ground in Ireland. Private equity has significant capital available for everything from minority structured investments through to buyout equity.”

Next year will be seen by some investors as a potential opportunity to invest in good Irish businesses at a lower valuation than they might have had to pay in previous years

—  Brendan O’Brien, Walkers Ireland

O’Brien agrees. “Numerous funders continue to be active in the Irish market and businesses have a wide range of funding options available to them. On the debt side, the traditional institutional lenders remain the natural first choice for many, but the banks can be slower to get to credit approval. Alternative lenders might be more expensive but can also be more flexible and quicker to get to funds drawdown, which could be crucial in these uncertain times.”

Equity investment comes in many forms, O’Brien explains, including everything from angel investors to venture capital and private equity funds. The emergence of indigenous private equity funds in recent years is a welcome development.

“These Irish funds know the Irish market very well and they continue to be very active. The US and UK private equity funds are also investing here, and this looks set to continue given the strength of the dollar.”

Equity investors can make a return only if they actually invest their cash, however. “While it might take them longer to write the cheque, deals are being done every week. Next year will be seen by some investors as a potential opportunity to invest in good Irish businesses at a lower valuation than they might have had to pay in previous years.”

Increasing interest rates will complicate matters. “A rise in interest rates impacts companies’ debt service capacity and, as a result, the amount of debt they can raise. Companies need to consider carefully the appropriate mix of debt and equity funding to ensure that the growth prospects of a business are not sacrificed to the demands of servicing a debt burden,” O’Kelly advises.

Companies will also have to demonstrate their capacity to deal with increased volatility. “From an availability point of view, private equity has record amounts of committed capital that it can deploy. Companies seeking to access that capital need to demonstrate how they can navigate any volatility. Many companies are choosing to be more defensive in their fundraising strategy with a preference for a higher equity cushion and greater debt flexibility,” he notes.

“Following receipt of funds, we urge companies to adopt a partnership approach with good communication of developments to ensure continued support when the business requires it.”