This panel from the 14th Independent Sponsor Summit, moderated by Claudine Cohen was to discuss where we are headed with deal flow and deal execution in the coming year. Claudine was joined by Nick Russell, Managing Partner at Tuckerman Capital, Drew Brantley, Managing Director at Frisch Capital Partners, Mark Fornasiero, Managing Partner at Clarendon Advisers LLC, Tarrus Richardson, Founder and CEO of IMB Partners, and Paul Marino, Partner at Sadis and Goldberg LLP.
Claudine kicks off the discussion by noting that the current market feels more cautious compared to previous years. Nick explains that his buyout strategy focuses on minimizing risk and using less leverage in their deals. He believes that despite the cyclical nature of financial markets, the smaller market is less leveraged and thus less affected by macro factors. He remains optimistic about their business despite the edges coming off the market, which he believes will be good for investors going forward.
Drew and Nick discuss the state of the deal market, noting that deal flow increased in the second half of 2020 and was strong in 2021 until the Fed's rapid rate hikes slowed down the market in the second half of the year. This caused the deal flow to come to a halt for some people in certain industries. However, valuations are stabilizing or coming down depending on the industry, and there is optimism that the deal market is starting to pick back up. The Fed's recent moves have added to this optimism, though recession remains a concern for many. Despite this, Drew believes that as long as expectations and reality are closed, deals can be done.
Tarrus expresses optimism about the market, particularly in the utilities and government services sectors, where they have seen growth in EBITDA and revenue over the past four years. His company closed two deals in 2022 and has two more potential deals in the works. They believe that choppy markets are an opportunity for those who have a long-term view and can tolerate some revenue or EBITDA fluctuations. As a law firm, they are lagging indicators, but they have seen the deal pipeline start to pick up again after slowing down in the third and fourth quarters of 2021. The state of the market may depend on where one sits in the capital stack. Overall, the speaker believes that a little nervousness in the market can be an opportunity to make money.
Drew mentions that the situation depends on where one sits in the capital stack, with smaller deals looking bullish, while high-end deals are predicted to experience pain due to a lack of capital. He's positive that sentiment will improve, and there will be a dip and rip in the market, with a lot of deals coming to the forefront in September or October 2023.
Mark agrees that times of uncertainty are a great time to do deals.
The deal-making process for independent sponsors is changing, with a shift towards a more phased and sequenced approach. This change has resulted in sell-side advisors rejecting the "seven parties, no exclusivity to the end" model in favor of a more level rational process, which is healthier for buyers and sellers. For independent sponsors, the amount of risk they are willing to take on from a dollar perspective and third-party due diligence perspective plays a significant role in how staggered their deals are. While staggering can make deals healthier, it is also driven by costs.
The panel discusses the importance of being cost-conscious and staggering deals in the current market environment. They note that the past four years have not been normal, making it difficult to determine what is sustainable and what is not. As a result, they recommend doing thorough research before making any deals to reduce the risk of broken deal fees later on. The speaker also stresses the importance of getting a company's "house in order" before selling, increasing its value and trustworthiness. They predict that the market may return to using earnouts and seller notes as deal structures in the future. Overall, the article highlights the importance of being strategic and thorough in deal-making to navigate the current market conditions successfully.
Overall, despite the uncertainty caused by the pandemic, some trends such as cost consciousness and the importance of due diligence have remained relatively unchanged. However, the lack of a "normal" year since 2019 poses a challenge for those evaluating the sustainability of businesses and their valuations. Nevertheless, strategies such as getting the "house in order" and staggering due diligence can reduce risk and increase the value of a potential deal. It remains to be seen whether certain deal structures such as earnouts and seller notes will become more prevalent in the future. Overall, the M&A market continues to evolve, and those in the industry must adapt to changing conditions and find ways to create value for both buyers and sellers.
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