With 2022 presenting a completely different M&A market than last year, dealmakers are putting a greater focus on stable, less cyclical and less economically sensitive businesses. Firms that struggle to pass along costs to customers or face material supply chain risks are under fire. With that in mind, Victor Capital is looking for deals that are well-positioned for a downturn.
Doug Korn, founder of the New York-based middle-market firm says that while there is plenty of dry powder and more private equity money is being raised everyday, dealmakers are continuing to approach transactions with caution in the final quarter of the year.
Korn says he is keeping a close watch on interest rates and the economy. “Deals are taking longer to close,” he says. “Buyers are increasingly worried about paying last year’s multiple on Ebitda that may be approaching a cyclical peak. In an unstable environment, sellers are increasingly focused on speed and certainty versus extracting the last dollar of purchase price.”
Victor Capital recently sold its portfolio company, PrimaLoft for $530 million in July to Compass Diversified. Korn says Compass offered “an informed point of view and a credit line that would fund the deal” to ensure speed and certainty of close, something that Victor Capital values in this market.
“There will always be talented PE buyers executing successfully in this and every other environment,” Korn says. “PE investors that have navigated multiple boom-and-bust cycles and have sector-specific expertise to help their companies will have competitive advantages at each stage of the business cycle. Experienced buyers who can create an edge in a process are particularly advantaged in periods of market or economic turbulence.”
Victor Capital is focusing in on industrial and manufacturing subsectors. Korn says that the firm is seeing flight to quality. “Strong businesses with defensible market leadership and a reasonably steady market outlook are very much in demand and can still command premium multiples. These can include businesses that benefit from recent government policy, such as in infrastructure or tech-driven substitution of new products. Those with more questionable or vulnerable business models are finding it more difficult to transact at multiples recently considered attractive.”
What are your tips to closing deals in the current environment? Shoot me your ideas at [email protected].
–Cole Lipsky
