Middle-market investment bankers gathering earlier today to discuss M&A on background had a lot to say about the shifting dealmaking environment. Revenue growth is the new margin expansion. Deal valuation is less important than quick execution—no, really! Let’s dive in!
Some anecdotal takeaways speak loudly about the current state of play. One banker notes that, on a given run in with a private equity investor before the pandemic, talk would revolve around portfolio company Ebitda margin expansion. Private equity investors would brag about increased profits, only later revealing that the profit driver was more likely to be cost cutting than organic growth. Now, PE cocktail chatter is more likely to lead with revenue growth. You have to get three to four follow-up questions deep to discover details about Ebitda, which the banker observed is now likelier to be flat.
Left unspoken is that the pressure to deploy capital is firmly in the driver’s seat for PE dealmaking.
Exactly what private equity firms are paying for assets can be less important than managing time, the bankers agreed, relaying conversations with their clients. This stunning admission comes as financial sponsor processes are stacked with competition, leaving bidders to only engage in sale processes selectively. Deluged with deals and with ample capital to put to work, the average sponsor doesn’t have time to hit three rounds of bids and confirmatory due diligence only to come up short.
In fact—in a solution that could have only come from the mouths of fee-dependent bankers—private equity bidders are advised to pony up a market-clearing price early. That gives the bidder space to ensure that whatever process ensues is more like a market check than a full-blown auction. The sponsor can breathe, knowing that confirmatory due diligence isn’t a waste of time.
The plug for IB services might well reflect more than marketing. Record fees for advisory firms means they’re raking in unprecedented insight alongside earnings.
Check back tomorrow for more insights from financial intermediaries into the current PE dealmaking action.