As the pandemic finally recedes after countless destructive waves, attention is understandably returning to the shape of what’s left behind.
Nowhere is this desire to evaluate and then take decisive next steps truer than in the north-east of Scotland.
Last year we saw strong mergers and acquisitions (M&A) activity across Scotland and the whole UK, with BGF recording a 40% increase in 2021 exits compared with the previous year.
This has in part been driven by some business owners looking to sell up and retire after the initial Covid-19 impact passed, and others who found exit options more attractive in the “new normal” for trading.
These exits have usually led to healthy returns for founders and management teams, and in 2022 we expect this sort of M&A activity to continue.
Alongside the disruption of a global pandemic, many businesses in Aberdeen and its surrounds have grappled with another fundamental change – the energy transition.
This evolving backdrop has prompted an adaptable and growth-orientated mindset in the 12 investments we have in various sectors across the region.
This includes BGF support for upstream energy technology group FrontRow acquiring Downhole Tools International, Ellon-based Aubin Group further developing its patented Deepbuoy technology to support floating wind projects and global remotely-operated vehicle specialist Rovop increasing its capabilities in the offshore wind space.
As this energy transition continues, the conclusion of the recent ScotWind offshore leasing round offers significant opportunities for businesses with the ability to adapt existing offshore experience.
The sheer scale of development proposed means significant supply chain prospects for companies across the north and north-east, and Scotland more generally.
But current capability and capacity could be stretched.
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Suppliers looking to maximise their attractiveness may pursue M&A to push to the front of this potentially lucrative queue.
Meanwhile, rapid innovation in associated sectors like hydrogen production, and carbon capture and energy storage could see similar focus as companies seek to capitalise on existing expertise and new decarbonisation opportunities.
Alongside the disruption of a global pandemic, many businesses in Aberdeen and its surrounds have grappled with another fundamental change – the energy transition.”
This trend was reflected through BGF’s £3.5 million investment in Aberdeen-based isol8 in 2021.
The company will use this cash injection to both grow its zero-emissions product portfolio and expand its services into the wellbore construction and sealing sector.
Energy and the associated transition will continue to lead business growth in the north-east.
But the emergent influence of life sciences, healthcare, food and drink businesses and other sectors that can draw on the high-quality skills base cannot be discounted either.
In 2021 many businesses turned to the public markets to finance growth.”
Rising M&A activity is usually the end result of any prolonged period of economic challenge, although access to the right sort of finance has always represented a barrier to success in this area.
In 2021 many businesses turned to the public markets to finance growth, and there was a glut of IPOs (initial public offerings) across the UK, with EY reporting the highest number of London listings since 2007.
We have seen this first hand in Scotland, having recently acted as cornerstone investor in the IPOs of Calnex and the Artisanal Spirits Company, and in the north-east with Ashtead Technology Group – demonstrating capital market investors will support the right energy investment story.
While many businesses and investors have one eye on the coming cost-of-living challenge and inflation in 2022, we are confident this won’t slow deal flow in the north-east overall.
Even as the sectors driving the bulk of local activity look set to evolve over time, it remains true that the shape of finance for any M&A must be carefully assessed to ensure growth-seeking businesses find the funding options that work best for them.
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We have found our minority investment approach, which saw £60m deployed across Scotland last year, gives businesses access to the long-term capital that is vital for successfully delivering an M&A strategy, without founders ceding control.
Another factor drawing entrepreneurs to us is our knowledge and understanding of the sector in question.
This is particularly important in the often specialised operating environment in the north-east.
Talent network
As well as the direct insight gained from growing multiple local businesses, we draw on our talent network, one of largest groups of board-level non-executives in the UK and Ireland, to add relevant experience as appropriate.
Of course, our approach is just one to consider within the wider funding mix, but as businesses assess the landscape for potential M&A-driven growth in 2022, all options should be on the table.
I believe there are choppy waters ahead for the global and UK economies.
But the continuing innovation of businesses we work with in the north-east inspires my confidence that the region is one to watch in terms of deals, emerging technologies and long-term diversification.
Paddy Graham is head of Scotland for investor BGF.
