|
The impact of the financial crisis on Scotland has been significant and will continue as public sector cuts begin to bite according to leading accountants and business advisers PKF. Corporate Finance partner, Frank Paterson, believes that the impact of the recession will continue longer in Scotland due to the significantly higher proportion of public sector spending. As Scottish local authorities seek to reduce their expenditure, the impact on local businesses will be substantial and create an even tougher market place for them to operate in.
Paterson made the comments as PKF published its twice yearly report, Deal Drivers UK, which is produced in association with mergermarket. The report found that the construction industry, in particular, has been hit badly by the financial crisis and without public sector infrastructure projects the impact would have been even greater. However the inevitable impending requirement for local authorities to rein in spending means that many of these projects may now be cut back or delayed causing further problems for the construction industry.
For the UK as a whole the survey found that deal volumes remained stable throughout the year. However valuations fluctuated, initially continuing on an upwards trajectory in the immediate aftermath of the financial crisis due to a number of high-profile governmental bail-outs. Indeed, the last quarter of 2008 saw total deal values of £44.5bn which by the first quarter of 2009 they had declined to £13bn and further down to £8.3bn in the second quarter. However, valuations have since begun to trend upwards, totalling a significant £48.2bn in the final quarter of 2009 which may augur well for future activity at the top end of the market in 2010. However this pick up in the market may not filter through to Scotland immediately.
Paterson explained: “Scotland is an SME market which has been hit hard and recovery will take time. He explained that many businesses are experiencing cash flow problems and as a consequence, growth is not even being considered at the moment. The recovery of the Scottish market will be further challenged by the enforced reduction in spending and job cuts which local authorities and the NHS is being asked to implement in the coming year.”
“In terms of debt financing, it will continue to be difficult to secure bank financing and this will continue to restrict deal flow. There are very few good, pure M&A opportunities coming to market in this climate. Unless the owner of a business absolutely has to sell, many are holding off until the market conditions improve and valuations begin to shift upwards. The valuation gap which was a feature of 2009, as well as 2008, will continue to be a feature of 2010.”
However, Paterson continued: “There are a number of sectors that stand out as being particularly attractive to investors in Scotland. Healthcare and the hotel side of the Leisure sector are areas which could see investment even in the current gloomy times. The energy sector remains strong whether it is Oil & Gas and Power Generation Services or the increased interest in renewables. “
But for other businesses the funding situation remains difficult: “Securing financing for organic growth remains extremely difficult and won’t get much better in 2010. More fortunate businesses are getting by on their existing banking facilities but for others - those which do not have sufficient existing facilities - there are real problems because they will in most cases be unable to secure additional funds from banks.”
Paterson concluded: “One of the issues is that the many changes within the banking industry has eroded many of the personal relationships that used to exist between local businesses and banks. Even where they still exist, lending now has to go through a number of committees, the security demands are that much higher and the real cost of money is that much more – that personal relationship does matter but not as much as previously.” | 