Valuations
khmarks June 5th, 2010
Last week we held our monthly National Funding Association meeting in Raleigh. Our guest speaker was Bill Hobbs, Managing Partner of Carousel Capital. Carousel is a buyout fund purchasing companies with at least $3 million of EBITDA located in the Southeast US. In addition to the industry trends and observations, Bill highlighted a phenomenon somewhat unique to our times; we’ve seen the same. That is, valuations for well run and good performing middle-market companies are strong and funding is available. Otherwise, valuations are depressed and deals tough to do …in many cases there’s no deal to be done. This makes sense given the back-drop of historically high dry powder in the coffer’s of private equity funds searching for deals to invest in. In fact, there is the greatest amount of overhang and pent-up capital ever for middle-market transactions.
ACG Intergrowth
khmarks May 17th, 2010
Unfortunately I was not able to attend Intergrowth this year. For those not familiar, Intergrowth is ACG’s (Association for Corporate Growth) premier national event. In speaking with a number of attendees over the past week, there was varied feedback and perspectives. In general it sounds like there is real excitement about 2010 and the outlook for getting deals done. Demand is being driven by expected changes in the tax code, by the need for private equity investors to deploy capital, and by strategics with a lot of capital seeking top-line growth that can not be met organically. Champ Davis of Davis Capital sums it up – “the deal market is back …first quarter was strong and there is significant pent-up demand by both financial and strategic buyers”. There does seem to be a question as to what will happen in 2011 and how the credit constrained debt market will impact the actual deals closed.
IPO Market
khmarks April 1st, 2010
Carolyn Saacke, Managing Director, Capital Markets for NYSE Euronext, spoke at our NFA meeting yesterday in the Raleigh, NC. The group enjoyed hearing her remarks and views on IPO activity and what’s been happening in the market. One of the notable items for me was the performance of the IPO market last year. In reading the press and listening to the media, I thought the IPO market was closed and was miserable; not so. There were nearly twice as many IPOs in 2009 as 2008. There were 59 IPOs last year which is about half the annual average since 1990 (excluding 1999 & 2000 each with about 330). The main reason for the improvement was discounted pricing below target of some very good companies. She says the indicators are good for this year, but still not as robust as they expected entering 2010.
I didn’t realize the breadth of global capital markets access through their exchange. With the consolidation in the exchange market and the acquisition of a number of platforms in Europe, the NYSE Euronext provides access to capital in the US, Europe and the Middle-East. Not just for the S&P 500 , but also for emerging growth and middle-market companies seeking capital of at least $40 million; the minimum market cap is now $150 million. This puts the NYSE directly competitive with NASDAQ in most capitalization segments …providing liquidity and greater global reach.
It is encouraging and exciting to see the markets rebounding; especially for mid-sized businesses.
Good News for Middle-Market M&A
khmarks March 13th, 2010
Private equity in small and mid-sized transactions may have started to turn upwards. According to the research at Pitchbook private equity middle-market deals bottomed in the 3rd quarter of 2009 and began to increase in Q4 with $15 billion invested in about 238 transactions; over half of those deals were less than $50 million in value. Interesting that while there were about half as many transactions in 2009 as compared to 2005, the value of those deals were about the same.
It appears that the equity required to get buyouts done on average for all buyouts is just about on par with 2006 at a little above 40% …but those deals in the middle-market with values between $25 million and $250 million are taking on average nearly 59% equity with 12% supported by sub-debt and the balance senior debt (as reported by GF Data Resources in February). They also reported that Q4 2009 enterprise values to EBITDA multiples for private equity deals increases slightly from Q3 to 5.2 from 5.1.
Anecdotically there is an increase in lower middle-market and middle-market deal activity this quarter …I see some enthusiasm and excitement hoping that the volume of activity holds, and that the deals can actually get closed.
Creative Financing Sources
khmarks February 13th, 2010
Quarterly we read about new private equity funds being formed, each with a market focus and sometimes a unique twist on the conventional model. In recent years we haven’t seen too many new debt funding sources, though a few. 2nd lien or Jr. debt became popular, funded by hedge funds, prior to the great recession. And we saw the advent of unitraunch credit facilities providing varying layers of debt in a single instrument surface early this decade. In addition, we have seen a some asset based lenders offer hybrid credit facilities; they operate like a line of credit, but have some of the legal mechanisms of factoring …one such firm is Federal National Payables – they have focus on government contractors.
A new financing source has emerged in the past year. Taking from the framework of the stock exchanges, The Receivables Exchange has created a trading platform for accounts receivables. It allows a company with revenues of at least $1.5 million (and that has been in business for at least 2 years) to sell their accounts receivables on an as-needed basis to an open market in a controlled and confidential way. I really like it because it may augment your existing line of credit and possibly increase overall availability. For example, you can sell foreign A/R, which is usually excluded from most domestic credit facilities. Because there is no long-term commitment to sell your A/R, a company can use this credit facility to support tight cash periods when needed and not use it without penalty when cash flow is strong. Since your company is selling invoices either in groups or individually, it may likely obtain a better rate for your financially stronger customers. I was skeptical at first, but after getting to know some of the folks and researching the business I’ve concluded that The Receivables Exchange is for real and will likely be a major player in the years ahead …it is funded by Redpoint Ventures and Bain Capital.
Deal Structure
khmarks January 15th, 2010
The winter conference of the Alliance of M&A Advisors finished today; it was well attended and I had a chance to catch-up with a some friends and industry participants.
The session on creative deal structures was interesting and thought provoking …most of the discussion was focused on distressed and tough situations. Here are a few bullets that I want to share based on the panel’s views –
1. A second wave of bankruptcies is likely in 2010 by companies needing to de-lever (with many companies having sales of 40-60%).
2. Interesting enough, the perspective of banks has moved from getting out of bad deals to one of restructuring tough loans to avoid further write-offs.
3. Banks in problem deals are looking for more equity in those deals (no surprise), mezzanine investors are looking to preserve value, customers are seeking continuity of supply and willing to invest, and employees are being flexible in compensation arrangements.
4. It is difficult to value investments by PEGs in distressed deals because of the back-loaded structure of deals with cash and equity earnouts. It was suggested that the approach to evaluating potential deals is to look at the likely value of positions 3-5 yrs out if the deal works.
5. Bankruptcy is too expense for many …there is an increase in out of court deals: (1) assignment for the benefit of creditors and (2) friendly foreclosures. Both of these tend to washout unsecured debt. Prepackaged bankruptcies are moving very quickly; now measured in weeks vs. months.
6. Lender liability seems to be less of an issue given the past five years of litigation and precedences set.
AM&AA 2010 Winter Conference
khmarks January 5th, 2010
Next week, January 12-14th, the Alliance of M&A Advisors is hosting its annual winter conference in Las Vegas. There is usually a wide variety of folks involved in middle-market financing and M&A there… investors, lenders, attorneys, CPA, investment bankers, valuation gurus, etc. The last conference was informative and valuable from the perspective of staying abreast of industry trends. I gained the most value from networking with folks that I knew and by making new industry contacts. It’s a good environment that facilitates deal flow and opportunity exchanges.
You may want to stay for the AM&AA post-conference workshop on Friday morning January 15th. There are several sessions including “The Value Edge: Learn How Private Equity Players and the World’s Top Companies Build Value and Wealth” and one that I’m leading on capital for growth companies.
I’ll keep you posted with feedback and observations after returning.
SMB Credit Outlook
khmarks December 23rd, 2009
In recent weeks I’ve been meeting with lenders, advisors and some CEOs involved in funding small and medium sized businesses (SMBs); also surveying the market for what we are likely to see in Q1 relating to the same. In summary – It continues to look tight.
Asset based lenders have been a fall-back resource for many firms with constrained credit from traditional bank credit facilities. In the ABL market, there appears to be a retrenching of players, with some closing offices and pulling back into their traditional geographic footprint. On the positive side, it appears that some deal terms (though minor) are easing i.e. removal of interest rate floors. On the constraint side …I haven’t found many ABLs yet willing to fund operating companies with negative cash flow …even with a good story and lots of solid collateral.
Given the potential positive impact that small companies have historically had in creating jobs and the gloomy mood of of small business owners (as Jim Smith shared in his December Economic Outlook www.econforecaster.com), we must continue to find alternatives and creative ways to finance operations. In that vein, this month our governor (of North Carolina) formally requested actions from the federal government to loosen credit and increase funding for SMBs. Among other actions, she encouraged extension of the 90% no-fee loans from the SBA and repurposing of TARP funds.
The most obvious disconnect that must be fixed for the banks to ease credit is alignment in how regulators are controlling bankers by forcing tighter rating of loans and the administration’s message and direction of creating liquidity. Even our Treasury Secretary Tim Geithner had no real solution when confronted in an interview on NPR yesterday.
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About thIS BLOG
This blog is for the leaders and advisors of emerging growth and middle-market companies (startup to $500 million in revenues). It is focused on financing, M&A transactions and strategic initiatives. www.HandbookofFinancingGrowth.com
About the Author
Lead author of the Handbook of Financing Growth...Advisor, Speaker & Expert in Financing, Turnarounds & Growth of companies. Kenneth is a Managing Partner of High Rock Partners, Inc.
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