Dunedin, a UK mid-market private equity house, is bridging the debt on its deals, enabling it to deliver the entire transaction without senior bank debt.
Dunedin, a UK mid-market private equity house, is bridging the debt on its deals, enabling it to deliver the entire transaction without senior bank debt.
The funding issue has been highlighted this week by the Chancellor, Alistair Darling, who has urged banks to increase funding to UK SMEs.
Dunedin saw the need to evolve the traditional private equity model during 2007 as the credit crunch struck.
Ross Marshall, chief executive of Dunedin, says: ‘We started to underwrite the debt on deals in 2007 and have done so on the last four buyouts we financed. We have used this debt bridging approach successfully in the buyouts of Fernau, Enrich, Formaplex and, most recently, in Hawksford International, where we underwrote the GBP25m funding requirement. The debt bridging model brings certainty to the vendor and the management team that the transaction will happen. It also provides flexibility to the new buyout company because more time can be spent arranging an appropriate debt structure outside of the transaction deadline.
‘However, providing both the equity and debt has its issues. Firstly, the private equity provider has to be able to provide the debt as part of its investment remit. Some private equity houses cannot do this because of the nature of the funds they manage. Secondly, the private equity house must have a sufficiently strong reputation and relationship with banks in order to arrange the senior debt post deal. And thirdly, the private equity house must carry out all the due diligence that the bank will insist on. This is why it is vital for management teams to choose a private equity house like Dunedin that has an established track record of delivering debt bridging on a number of transactions.’
Dunedin has refinanced the debt on three of the four deals where it provided a debt bridge. In Fernau Avionics, the global navigational aids company, senior debt was provided by Lloyds Bank after the buyout. Senior debt was provided by Allied Irish Bank to Enrich, the employee benefits business, and Royal Bank of Scotland provided the senior debt for Hawksford, the Jersey trust administration company. Dunedin chose to retain the debt in Formaplex, a specialist engineering company, in order to give the business the flexibility to grow by acquisition.
