By Eleanor Haas
Just how far-reaching is the
fallout from July’s credit crash? Major
financial markets firms took big hits, and two lost their CEOs – Merrill and
Citi. Morgan Stanley just lost a
co-president. News commentators wonder aloud
whether we’re headed for a recession. In
fact, news media are full of gloom and doom. But perhaps their heads are too high up in theoretical clouds to see the
reality that the sky has not fallen – smart investors are still making money.
My friend John says his HNI
friends (High Net Worth Individuals) are fleeing to the security of mutual
funds. My friend Jeff is having success
raising a new venture fund. My friend Arthur is
judiciously managing his portfolio of real estate investments, buying or
selling, wherever the best advantage lies. Three different kinds of opportunity for three different kinds of savvy investors.
In other words, financial life
goes on. maybe It’s not mayday after all – at
least not yet.
Speakers from three private
equity funds bore this out last evening in the course of a panel discussion on
Exit Strategies and Fundraising in a Changing Environment, which was sponsored
by WAVE (Women’s Association of Venture and Private Equity). Opportunities abound for those who know what
Timing is everything, said Raquel
Palmer, a partner with KPS Capital partners, which buys troubled companies and
fixes them. “We had nine exits in
fourteen months,” she said, “the foreign market is still open. The US is on sale. European and Japanese
strategists get good value.”
“The market is open, but
selectively, by company and by sponsor” said Linda LaGorga, Managing Director,
Financial Sponsors Group, Goldman Sachs, who sees good exits for strong assets
in the $50 million EBITDA and above market. “The financing market is volatile. It’s there for some assets, not others. You have to get ready and time it.”
“Strategics were not hurt by the
bank pull-back on financing, as private equity funds were,” said Bill Jarrett,
Managing Director, Lower Middle Market, Goldsmith Agio Helms/Lazard Middle Market. “We’re more selective. Some industries are out of favor –
housing. Service industries are dong
well, for companies with good cash flow and EBITDA.”
Services with good cash flow and
steady growth, which are not cyclical, sell well in this market, and buyers are
out there, agreed Ms. Gorga. Large
private equity funds want to buy by the end of 2008, so they play at the lower
level, $750 million, look at smaller assets in order to put money to work. PIPES are another way to put equity to work
now and be in a good position later.
Niche companies in their
segments – often with consolidation – are a good bet. Mr. Jarrett sees “lots of buyers for rollups
and synergistic acquisitions. An
international component to the transaction can be a deal sweetener – a foreign
buyer or an international component of the company.
What private equity buyers have
to look at in making an investment is the exit opportunities, so they look for
companies with strong market share – a good niche player with a franchise, Ms.
Palmer pointed out.
What about valuation, pricing
- There’s still a backlog of leveraged loans, and this
impacts big buyouts, as does concern about a potential recession and the
volatility of the housing market. Most deals in the $50 million and above market have covenants,
going back to the more traditional deal. Leverage has come down. It’s
2002 all over again. The market
- Valuations are down. There’s a shifting of risk – escrows, warrants, liabilities. Sellers may take lower multiples if the
terms remove certain escrow commitments. Seller financing is coming back, which can help bridge the gap
between expectations and valuations.
- The lower middle market depends on smaller banks for
financing. The pullback is at the
high end of the market, not this one, where lending may now be a 3 times
EBITDA as opposed to 3.5 times. Smaller banks are cautious now, but they’re still financing
What kinds of deals have you had
since the credit crisis began?
- KPS is having “great deal flow” because companies
can’t readily get bailout funds. Two of four companies KPS is looking at are operating in Chapter
11. This makes them easy to clean
up and recapitalize. KPS expects to
see more of this. Investment banks
used to dictate pricing with staple financing, but people are not seeing
these any more.
- The Middle East has huge amounts of money – multiples of the largest US funds – and offers good ways to sell a company. New lenders are stepping up – new banks are entering the market. Mezzanine funds are key. Goldman has a $9 billion fund that is stepping in and taking a subordinated part of the capital structure.
- Typical deals take six months but now often take longer. On the other hand, a strategic – a domestic strategic – just did a deal at 10 times revenue in two months – with no book. International buyers take longer.
What about buy side
- There’s still a lot of liquidity in the market. People will have to put in more equity,
and sellers have to have more reasonable expectations. Private equity funds raise funds to buy
debt and then take on debt to do this. That’s high risk. Many
private equity funds won’t be successful raising funds because they can’t
differentiate or create value for investors. Smaller PEs will vanish.
- It’s a good time to buy a business and to buy it
cheaper, and lots of companies in distress is an incentive to buy. Hedge funds are tempted. Their managers know how to run funds but
lack experience with Chapter 11 and restructuring. They’re getting smart about Chapter 11
strategies with distressed companies.
- Seller expectations will come down, i.e., valuations. The credit market will stabilize. 2002 buyers did very well. You just can’t predict the timing of the cycle.
- PEs continue raising a lot of money. This adds to the buy side. Boomers are aging, are concerned about
possible increases in the capital gains tax and so want to sell now. Corporate performance is strong. The stock market is off but companies still make acquisitions. Smaller banks will continue to lend.
To quote the French, the more
things change, the more they are the same. Those who remember 2002 and other periods like this have the confidence
to make wise decisions. Those who know
what they’re doing do it right. For
them, it’s payday. For the unknowing or
under experienced, beware. For them, it
could well be mayday.
# # #