About six years ago hedge fund veteran Wayne Moore was making plans to launch Crux Capital, a private equity firm focused on the lower middle-market. Based in Dallas with a house in California, he asked his wife where she would like to live, since they could set up shop almost anywhere. California was out for tax reasons, but other regions beckoned.
So Moore hired an analytics firm to review the top 100 U.S. markets in terms of sheer population, competitive dynamics and population growth, and quickly concluded that they didn’t have to move at all. “Dallas was the best place in the country to open a private equity firm,” he says.
The same was true for Daniel Meader, managing partner and co-founder of Trinity Investors, a Southlake, Texas-based PE firm launched in 1999. Meader, who went to college in Texas and stayed, appreciates what the state has meant for his firm. “Why didn’t I move back to Colorado? My opportunities to get deals done were far greater in Dallas than they ever would have been in Denver,” he declares.
There’s something special about Texas, a state with four thriving metropolitan areas: Dallas-Fort Worth, Houston, Austin and San Antonio. According to the U.S. Census Bureau, Texas is the second most populous state in the nation with 30 million inhabitants, behind California, which is losing people and businesses. In 2023, year-over-year, Texas added almost 500,000 new residents and experienced the largest population growth in the country. Texas also boasts higher education institutions, no corporate income tax, a favorable regulatory environment, open land for building and lower-cost real estate than many other regions. This means a young and educated labor supply, new businesses sprouting, ongoing residential and commercial construction, and M&A activity that persists despite a nationwide slowdown.
“Last year was a killer year for us,” Moore says. “We did two add-ons, raised a restaurant holding company fund and did a platform acquisition.” Four of Crux Capital’s five platform companies in the consumer and services sectors were founded in Texas, and Crux moved its fifth platform company, originally based in Memphis, to Dallas.
“Dallas is a hotbed of entrepreneurship,” echoes celebrity investor and American businessman Mark Cuban, who lives there. “Where there are great entrepreneurs creating companies, the private equity money follows, and we have just seen that here.”
Texas Temptation
From the outside looking in, it’s easy to see why Texas appeals to dealmakers. The state has multiple airports, allowing for easy access to both coasts. Many PE firms, investment banks and M&A advisors call Texas home, and Dallas is a banking hotspot. “We have so many buyside shops,” Meader says. “If you don’t get deals closed, you don’t stay in business.”
Wells Fargo Bank (NYSE: WFC) and Goldman Sachs (NYSE: GS) are constructing sprawling campuses in Dallas. Nicholas Beare, managing director and head of the building and infrastructure group at investment bank Stephens, in Dallas, says acquiring a permit to build is easy compared to other U.S. regions. “Goldman Sachs is building a new substantial development in downtown Dallas, six city blocks. Why? It was easy to get permitting to do it,” he says.
Beare says his firm has also seen “a nice, healthy mix between strategic and financial buyers” in the construction space.
But Dallas isn’t the only city seeing increasing business bustle. Energy hub Houston, IT-focused Austin and healthcare and bioscience town San Antonio all grew in population over the past two years, the Census Bureau reported. No industry dominates the state, so if one sector turns flat, another may flourish, creating a more stable economy.
Digging deeper, Texas has seen explosive growth for another reason: its culture. Unlike other states, which can be considered cutthroat in business and M&A, Texans crave camaraderie. They like to do business with fellow Texans, Moore says, and they are generally collegial and supportive of even their rivals, wanting everyone to succeed. There seems to be no barrier to entry for newcomers, as long as they love barbecue and can mesh with friendly Texans who have an entrepreneurial, go-getting spirit.
“As a general rule, come one, come all to Texas. Plant your flag and we’ll welcome you with open arms,” hails Robert Kibby, a middle-market M&A attorney and shareholder at Texas-based Munsch Hardt Kopf & Harr. Private equity firms “that have a good bedside manner and can-do attitude” should prosper in Texas, he adds.
Numerous independent sponsors and family offices, such as Petrus Asset Management, the investment firm of late American businessman Ross Perot, also operate in Texas, and dry powder needs to be deployed. “There isn’t just one or two checkbooks in town where you’ve got to go kiss the ring,” Meader quips.
“There’s absolutely a deal culture for people who live and work in Texas,” he says. “And it’s different than other parts of the country. Part of the reason we have a more resilient M&A market is because people are wired as to how to get things done.”
Texas originally survived because its people “had to bet on commodities — cattle, oil, land,” Meader says. “This economy is built and continues to thrive on people who want to make deals because they are ready to take the risk.”
Even the late Perot concurred: “The most successful people in the world aren’t usually the brightest,” he once said, as noted on his firm’s website. “They are the ones who persevere.”
Weathering the Storm
Despite its bliss and bluebonnets, Texas faces growing pains, such as electric grid issues and affordable housing. Dealmaking slowed in 2023 in manufacturing and tech. Construction, real estate and related industries hit road bumps due to interest rates. Multiples dropped and lenders scrutinized, lengthening deal timelines. And sellers’ expectations didn’t jive with those of buyers.
“Time is either your friend or your enemy, and in all cases time kills deals,” Meader says. Despite this, his firm made numerous commercial real estate acquisitions last year.
Dallas-based Justin Turner, a partner in the transaction advisory services practice at accounting firm Baker Tilly says buyers are also dissecting which deals they consider, “making sure they know what they’re stepping into.”
Bobby Renkes, managing director and founder of Pinecrest Capital Partners, a Dallas-based investment bank focused primarily on Texas middle-market companies, says 2023 was “an average year” for his firm. “Most banks are not nearly as aggressive and they’re significantly less flexible, but private lenders are supporting the M&A volume,” he adds. Last year, Pinecrest advised Texas-based Fuego Tortilla Grill on its sale to Crux Capital.
The Texas slowdown mirrored the rest of the country, but the state fared better than others. For certain M&A players, dealmaking never waned.
“Last year was the best I ever had,” Kibby notes. “We closed a lot of transactions, but it was the first time in my entire career where I had seen so many price reductions from the time of letter of intent to the time that the deal was closed.”
Dealmakers are still wrangling with price reductions, earnouts and longer due diligence periods, he adds. And buyers are focusing more intently on a target’s quality of earnings. “Deals are still getting done, but sometimes you’ve got to get creative to get them closed,” Kibby admits.
