Source Talks ep. 33

Source Talks is a series where we discuss deal origination with expert PE and M&A pros.
In this interview, David Toll of speaks with David Clark, Managing Director and Head of Financial Sponsors at Raymond James on the cautious approach buyers are adopting, and what he predicts for valuations in the months ahead.

David, tell us about Raymond James and the kind of deals that you work on there.

Raymond James was founded back in the early sixties. It went public in ‘83. It’s now close to a $10 billion revenue company, probably most well-known for its wealth management business. But the investment banking part of the business has actually been the fastest growing over the last five years. From a transaction perspective, M&A is what we do. Each of the last two years, we’ve closed over 220 M&A transactions. And of those, close to 160 of those transactions each year involve private equity firms.

David, how have a higher interest rates and now the prospect of a recession impacted the sponsor deals that you’re seeing this year?

I think the recession is really causing buyers to really try to understand, what is the sustainable level of the business going forward? As a result, buyers are being very cautious about what they’re valuing businesses off of, and are more concerned about paying off of future growth of the business. Anything that’s expected to grow 20%, 25% over the next nine to 12 months buyers are very skeptical about that and not really willing to take that risk on themselves. So overall, valuations are going to come down and are going be more focused on trailing numbers versus projected or pro forma numbers.

And David, tell me how are you seeing the sponsors sort of adapt to those new conditions, both as buyers and sellers?

We’re seeing more private equity firms wait on selling companies. They are waiting to see when the market kind of settles out. Some of the uncertainty around the recession goes away. So they’re being a little bit more patient in terms of exiting investments on the buying side. What they’re trying to do is, for those that can do more structured equity or more minority investments, using as an option for sellers. So instead of selling control of the business, maybe a better option is to sell a minority stake at a lower valuation, but the owner continues to control the business going forward and keep the bulk of the economics. Other ways they’re trying to do it is around kind of the structure of the deal. So earnouts are becoming more commonplace now, or even royalty payments. So if the company does grow and it does what the sellers expect, they’ll receive something in the form of internet payment or royalty payments going forward.


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