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Adapting to uncertainty and finding ways to grow

Dave Munton Dave Munton

Against the headwinds of political and economic uncertainty that have been a consistent feature of the UK economy over the past year, mid-market firms have continued to prove their resilience.

For some, doing deals is how to get ahead. With the profits of this year’s Sunday Times Grant Thornton Top Track 250 up 20% to £5.9 billion on combined sales of £63.4 billion, many firms are catching the eye of domestic and international investors.

Despite the ructions in Westminster, inquiries from American, Chinese, Indian and Middle Eastern investors have increased. There have been 7,119 mergers or acquisitions involving UK companies by foreign buyers since the start of 2016, according to the data firm Dealogic, up 40% on the previous three years.

It means UK management teams have options — and are making big calls. Derby-based Pattonair, for instance, a Top Track 250 alumnus, agreed a $1.9 billion merger in August with its American aerospace peer Wesco. Earlier in the year, Alastair Storey, the founder of catering group WSH, chose to raise capital by selling “a significant stake” to the American private equity firm Clayton, Dubilier & Rice, in a deal valuing the former Top Track 250 member at £780 million.

The fastest-growing companies on this year’s league table have also acted decisively. For instance, Patrick Crean, the chief executive of Paragon (No 9), a marketing services and technology group with sales of £594.6 million in 2018, has tripled the size of his business in recent years through organic growth and deals in the UK and the rest of northern Europe.

Instead of tapping private equity, Crean has retained ownership and used Paragon’s strong cash flows and credit rating to buy complementary businesses. Since 2016, it has issued €141 million in bonds on the Luxembourg MTF market. The most recent was significantly oversubscribed.

This experience reflects our conversations with companies operating in the UK’s mid-market. Learning from the last financial crisis, companies now have a tighter control on their treasury functions and pay much closer attention to working capital requirements. Management teams with this disciplined approach to finance, and a clear vision, are attractive to institutional and private equity investors.

This dynamic is giving private companies such as Paragon the confidence to pursue their plans. Sean Shine, Paragon’s chief operating officer, says his industry — customer communications and marketing services — is undergoing “dramatic change”. The continuing rise of digital communications is one factor, and the new GDPR regulations on personal data use are prompting companies to rethink how they contact customers.

“There is now a much higher risk of sanctions, and this means companies are questioning the capability and processes of their suppliers,” says Shine , adding that Paragon is in a strong position. Although there is a degree of uncertainty, the market is ripe for consolidation. We continue to review a number of significant acquisition opportunities, and have the funding lined up to execute the right deals.”

Like Paragon, more than half the companies on this year’s Top Track 250 operate overseas, and there is no substitute for being on the ground when local opportunities arise. To help more mid-market companies capitalise on overseas opportunities, our Growth 365 international team of advisers works alongside management to expand their businesses. We can tap our global network of 50,000 people in 135 countries, leveraging their connections and providing valuable introductions to customers, suppliers and local advisers.

After all, great business ideas can come from anywhere in the world. Five Guys (No 191), for instance, took the concept for its freshly prepared burgers and milkshakes from America and launched it in the UK in 2012, where it already has more than 100 restaurants. A good-quality product at a distinct price point, delivered with American-style customer service, makes Five Guys stand out clearly in the competitive casual dining sector. The company also uses its mystery shopping programme to invest almost 2% of its £149.5 million revenue in its staff, rewarding excellent service.

Looked at through the lens of this year’s Top Track 250, Britain’s mid-market companies remain in good health. International capital continues to knock on doors, and our leading mid-market companies will be able to use that money to create jobs at home, as well as to take their intellectual property out into the world.

This article first appeared in the Sunday Times Top Track 250 supplement, published on 6 October.

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