The buyout boom is soon to commence, so went the headlines this week. The Trump administration has altered the rules on debt, thus shifting the M&A landscape. Per Josh Kosman at the New York Post, regulators “last week lit the fuse on what some on Wall Street believe will become an explosion of private equity-fueled acquisitions…” with the abolishment of the rule “…that limited debt on LBOs to six times a company’s EBITDA.” The scuttlebutt: this roll back could rival the 2006-2007 buyout craze.
Where are the billion-dollar plus deals?
Reviewing bulge-bracket transactions from 2014 – 2017, deals have been relatively flat in 2016 and 2017. With the roll back of the debt rules, will this impact these larger transactions in 2018? Well, so far, January and February saw a mere 22 transactions trade north of $1B. This falters in comparison for the same two-month period in 2017 (48 deals), 2016 (38 deals), 2015 (46 deals), and 2014 (34 transactions), which closed the least deals overall. Perchance firms are in a holding period, waiting to see where this market is headed.
Of the 251 deals that closed in the $1B range in 2017, 53% traded to an equity investor. We know that investors are flush with cash (Bloomberg reported last week that dry powder has reached $1.5 T) and looking to deploy capital. As a sell-side intermediary advising on these deals, how are you preparing to identify these potential new buyers? Dusting off the old Rolodex?
Where are the buyers?
Pivoting slightly here, it’s understood that $1B+ deals are not the bread and butter of M&A; the middle-market is where most activity occurs, chiefly in the sub $250M EV range. If we take the recent news into consideration – Rolodex jokes aside – how can sell-side advisors establish who the right buyers are for their clients who are looking to capitalize on these market conditions?
In the sub $250M EV range during the calendar year of 2017, 6,687 transactions traded, with 46% closing to an equity investor (either as a new platform or add-on opportunity). As we look at strictly new platform investments of the top-twenty Sponsors in 2017, the vast majority of these firms closed at least one deal per quarter, with some averaging nearly two new platform investments per quarter. Are any of these investors in your affinity group? If not, it would be expedient to know which lenders or lawyers that these sponsors worked with that you also have established relationships with, particularly those on a repeat basis. This will help to identify warmer leads into these firms, and enable you to get a more personalized perspective into their culture and investment approach.
When you are sifting through the data on these prolific investors, notice any trends with sponsors or strategic investors that they have repeatedly co-invested with on deals. To find the most relevant buyer and exploit current economic conditions, it’s worthwhile to rediscover your prevailing relationships to detect any warm leads and obtain better visibility into these investors.
Any other means to tackle this market?
Another approach to navigating this market is to evaluate sponsors that may be ready to harvest companies in their portfolio this year. In SPS’ Harvest Report last June, there were more than 4,600 firms that were potentially ready for exit, with 88% of these firms in the sub $250M EV range. This market is ripe for investment, and your closest relationships could be the fount for hundreds of new, relevant sources of deal flow.
Are you ready for the boom?
Last week’s deals today
February 26 – March 2, 2018
~135 deals traded! The most deals for any week this year!
Deal of the week
Apollo Management purchased Phoenix Services International LLC from Olympus Partners last week. Both Goldman Sachs and William Blair acted as the sell-side advisors on this transaction.
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