For many of B.C.’s alternative financiers, 2011 ended up being a strong year.
The ratcheting down of economic forecasts and renewed panic in global stock markets tied to the Eurozone debt crisis has failed to reduce access to capital or dent the willingness on the part of business owners to make significant deals in B.C.
According to Axel Christiansen, Business Development Bank of Canada managing director of subordinate financing for B.C. and the Yukon, “During the 2008 meltdown, everybody ran to the sidelines. This time around, we didn’t see a hiccup. People were either shrugging it off or carrying on irrespective of what was going on in the broader markets.”
Christiansen noted that his BDC division closed 11 financing deals in the past year. About half of those were mergers and acquisitions involving management buyouts or a retirement-related change of ownership.
The lion’s share, he said, were companies with exposure to the global economy that ranged from expanding markets in Asia and the U.S. to taking advantage of opportunities in the resource sector.
“All together, we exceeded our targets for the year. So, from our perspective, we are quite pleased with the year.”
The sentiments were echoed at First West Capital, a young mezzanine-financing firm that was launched in October 2010.
Kristi Miller, one of First West’s vice-presidents, told Business in Vancouver that 2011 “was a banner startup year for us.”
Miller noted the firm committed $17 million in financing in 12 transactions. Of the dozen deals First West completed, eight involved mid-sized companies in B.C. and were M&A-related.
The mood among financiers has improved from a year ago. Last January, financiers faced a business environment in which mid-market companies were either in survival mode or focused on sustaining earnings rather than expanding their businesses. (See “Beyond the storm” – issue 1109; January 25-31, 2011.)
For many, rising business confidence in B.C. created an opportunity for baby-boomer business owners to take the leap and sell their businesses.
“I think we’re seeing a few more [succession] deals now because a bunch of business owners in 2008 saw their companies drop in value dramatically,” said David Mullen, Fulcrum Capital Partners’ managing director and chairman. “Now that their business has come back, some say, ‘I’d better get out now.’”
Locally, Miller said it could be a seller’s market for business owners because the demand for acquisitions continues to exceed supply. Generally, businesses have much stronger balance sheets, B.C.’s economy continues to be resilient to global financial turmoil, credit availability remains strong and interest rates remain at historic lows.
Larry Moss, president of Liquid Capital BC, noted his accounts-receivable (AR) financing firm, which opened two years ago, has continued to grow, helping smaller companies expand.
AR financing, or “factoring,” allows a company to receive a cash advance of up to 85% on its receivables, which can help it take advantage of potential growth opportunities.
Tom Klausen, senior vice-president at First Vancouver Finance, noted that factoring can provide another level of cash-flow certainty in a time when cash is king. It can also help evaluate a client’s solvency, which is an important service companies selling to U.S. customers.
“About 30% of our business are U.S. receivables,” said Klausen. “So it’s a common thing and a lot of companies are looking into selling into the U.S.”
While factoring has been considered a source of capital for struggling companies, Klausen noted that slower business growth is not good for its niche financing market.
“The biggest challenge facing our industry in the coming year is that businesses don’t need us because sales are declining. Those that best take advantage of what we have to offer are … growing rapidly.”
A common refrain from financiers is that while business optimism and growth opportunities exist, business owners remain cautious. Even with willing lenders and historically low interest rates, demand for capital remains muted.
Both Christensen and Miller noted that companies capable of borrowing to finance growth or acquisitions are hesitant to leverage up their company because market risks continue to be high in many sectors.
The exception has been the resource sector, where both firms have had some growth-related lending in the past year.
S&P’s recent credit downgrades of nine Eurozone countries have thus far not significantly rattled global equity markets. But locally, financiers remain concerned about the potential for new problems to restart another business confidence crisis.
“I’d be cautiously optimistic,” said Christensen. “I do heed Mark Carney’s constant warnings where consumers are leveraged to their eyeballs and our real estate market looks frothy. If China catches the sniffles for a few quarters, that could be a real problem for us. So I do see a lot of risk. But I have a lot of confidence in the resilience of entrepreneurs.”
For now, business appears relatively brisk. Both Christensen and Miller are working on several financing deals.
For First West Capital, 2012 is shaping up to be another positive year.
In November, the Langley-based subsidiary of First West Credit Union opened up a second office in downtown Vancouver. This year, it also plans to increase its maximum loan size to $7 million from $5 million and hire at least one more employee. It’s also expanding its geographic reach, offering financing to companies in Alberta.
Said Miller: “As fantastic as 2011 was for us, 2012 can be even better.” •
