It is no secret that private equity firms are flush with cash and are ready to spend it on acquisitions. NewSpring Capital invests in middle market and lower mid-market businesses that have up to $50 million in revenue across the financial technology, logistics, government services and cloud/IT sectors. “We believe we are headed for a fairly healthy environment for economic growth,” general partner Skip Maner tells Mergers & Acquisitions in this Q&A.

Where does NewSpring see deal opportunities?

We expect there to be ample dealmaking opportunities among middle-market and family-owned businesses across a wide range of industries coming out of the pandemic. Growing a business is a challenge in any economic climate, but after periods of volatility, similar to that of 2008 with the Great Recession, many founders welcome the idea of bringing in a financial partner that can not only provide downside protection, but also offer a capital infusion and operational guidance that can help their business reach new levels of growth.

Additionally, there is abundant access to capital today. While we are likely entering a period of rising interest rates, we still expect the supply to remain robust over the next couple of years, further contributing to a strong M&A environment coming out of the pandemic.

Skip Maner

What sectors are ripe for growth?

We believe there are still significant growth and M&A opportunities in the sectors where our four platform companies currently operate: financial technology, final-mile logistics, government services, and cloud and IT services. We’ll continue to invest in these areas as long as there is fragmentation and potential for further growth.

For example, our portfolio company Magna5 operates in the cloud and IT services space, where there are thousands of different players. We’ve made one add-on acquisition this year and are looking to make three additional deals per year in the sector going forward. The final-mile logistics space, where we have an investment in USPack, is another that is ripe for fast growth in the near future. Demand for online shopping and home delivery has skyrocketed during the pandemic and the need for reliable, timely final-mile delivery has become more critical than ever for countless brands.

Beyond our four sectors of focus, we are always interested in technology-enabled services companies in industries that are ripe for digital transformation. Specifically, we seek out companies that have an opportunity to leverage new technology in ways that enable them to run their companies better and more efficiently or provide a superior digital experience for their customers.

What size deals will the firm seek?

Typically, when we invest in a new platform company, we seek companies earning between $25 million and $50 million in annual revenue. For add-on acquisitions to these platform companies, we typically invest in companies earning between $5 million and $50 million in annual revenue. We target family-run, lifestyle businesses in growing markets that possess highly recurring or reoccurring revenue streams to provide substantial visibility.

What’s your M&A forecast?

The U.S. is now awash in capital from the U.S. Treasury as well as the Federal Reserve. As that cash makes its way through the economy, we should find ourselves amid several years of strong economic growth and, with that, robust M&A. The potential to enter an extended inflationary period is one potential risk factor depending on how that plays out. However, we believe we are headed for a fairly healthy environment for economic growth and M&A going forward over the next several years.

Another factor to consider is that valuations of middle-market businesses have remained high for several years and could stay at elevated levels in the near future. As a result, dealmakers must remain diligent in deal structuring.

We’re focusing only on companies where we see significant long-term growth potential and a clear pathway for us to create value. Because of this, our strategy has been constructed in a way that evades down cycles by focusing on companies in industries where we see the opportunity for growth through all economic conditions.