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Peter Brooks, managing director of LDC, the private equity arm of Lloyds Banking Group, has over 20 years of experience in handling mid-market deals. He remembers doing business in the last recession.

The one lesson that we can learn from other recessions is that M&A valuations will rise again. From that, you know that it’s better to invest in early stage, recovering markets, rather than risk everything at the top of the cycle, when values can only go one way.  

I remember working on an early deal in my career. We bought a business based in Glasgow called Oliver's Coffee Shops for £1.5 million in 1990, right at the top of the market. We had a very tight covenant for paying interest – we thought we'd get away with it and of course we didn't.

The market declined in 1991, interest rates shot up and it led to substantial problems. It was a buy-and-build strategy and in order to work, we needed the company to open more shops. In addition, the business was very highly leveraged.

A slight underperformance at the [revenue] level led to heavy underperformance at the net profit level. We breached covenants and the cash generated by the company was much lower than planned.

Size matters

It would have been much better to wait until 1993 or 1994 to buy the company, when prices had calmed, and debt had become cheaper and more available. We managed to sell the company in 1994 and get our money back, but we should have done better. If I could do it again, I wouldn't have borrowed as much money and I wouldn't have accepted such strict covenants.

Also, I wouldn't go for such a small deal now. Small businesses are more sensitive to externalities. If there is a slight deviation in turnover or if costs are slightly higher than expected, it can have a big effect.

Similarly, we invested in a small magazine printing business called Thamesmouth Printing for £1.5 million around the same time. The business was working on paginations around the clock. When the markets turned in 1991, the business struggled and so did the magazines that were printed. This meant that the presses weren't running to full capacity, and in a fixed cost business, it knocked profit considerably. It was a question of market timing and we could have anticipated it. If we had been disciplined and really analysed what was in front of us, we could have seen it coming and not taken the risk. We sold the business shortly after to a competitor and we recouped 75 per cent of the capital we invested, but it was a mistake.

It has been a difficult year for private equity. We've managed to continue doing deals throughout the downturn because we've escaped the excesses that some people fell for. We have no history of highly leveraged buy-outs. Lloyds has given us funds because we've made a profit through the cycle.

Although people are still cautious, there are some signs that deal activity is improving. The mid-market in particular is still pretty active. Businesses are prepared to accept lower prices and adapt to lower gearing.

We're at the bottom of the cycle and valuations are about as low as they will go, so it's a good time to buy a business. I still think that 2010 will be a cautious year. The government is preparing to hike up taxes and VAT is also expected to increase, so I think that it'll be a guarded start for many businesses.

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