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Investment Exits a la Covid

At times of high economic uncertainty, investment activity and property development can stall as buyers retreat to the sidelines looking for bargains, while sellers are reluctant to ink a deal that may look cheap ‘if’ the market out-performs in 2021. 

COVID-19 created both unprecedented uncertainty and practical obstacles to dealmaking. Global lockdowns suddenly meant it was impossible to meet in person, develop relationships or to kick the tyres of a business and get a feel for its people, culture and operations. Despite all this, when the strategic rationale is strong and a target performs well, attractive exits can still be achieved. 

We can look at two distinctly different investments to illustrate the impact and the opportunities: a real estate development, and a SaaS enterprise scale-up. Let’s start with the SaaS business, a cloud-based HR engagement and performance software package, that experienced an unexpected growth curve as employment and working models saw a dynamic shift in 2020.

They say it takes 66 days for a habit to form. As a society we’ve had much more time than that to adapt to working or running businesses in the Covid environment, and this led to greater adaptation and utilisation of software – including HR management packages. Similar to the story of Zoom, valuations have seen an uptick for software packages that provide structure and simplicity to the currently fragmented working model.

Timing and the investment horizon were evaluated in the usual course when the VC backers of Clear Review funded the SaaS HR firm on its A Round. But when a strategic acquisition by Advanced, the UK’s third largest software company, was presented as a profitable and chance exit, that exit came early. And at the stellar level of 75% IRR for the VC. Many firms and funds have been dealt a blow by covid, by way of some portfolio companies running at full burn-rate but seeing their market take-up abruptly halted, but the right positioning can have quite the opposite result.

Looking at the dynamic shift from another perspective, structured finance to support residential property development must be taken with both a long and short view on the impacts of covid. In the short term there is uncertainty in the market and those with good experience of sourcing and developing good land sites are able to capitalise on the current opportunities. By the very nature of building and selling real estate the horizon to completion and exit is at least a medium term out look – by which time all parties to the project should expect that economic volatility in the UK is less uncertain, and demand for housing will not have subsided. This is exactly what we’re seeing currently, with our network of investors showing strong support for those developers who present a strong property development proposition.

Whilst existing plans to build businesses over longer periods, to be positioned as a strategic target for a larger consolidators in the marketplace, the pandemic had rapidly accelerated and refocused many sectors and has created opportunities for attractive exits, much earlier than envisaged. We may all be indoors this month, but there’s a silver lining of optimism out there.