As chief executive of Axial, Peter Lehrman is well positioned to spot trends in the middle-market. New York-based Axial provides an online service that connects buyers, sellers and financiers of private company deals, primarily for companies with annual revenues of $5 million to $100 million. Axial’s customers include private company CEOs who are researching and developing connections with investment bankers, buyers and sources of capital for potential deals. We spoke with Lehrman to learn what he’s seeing in the dealmaking landscape.
How is the upcoming U.S. presidential election affecting M&A?
The election year is casting a bit of a shadow over health care businesses that are integrated into President Obama’s health care regulations. A Republican win could ripple through a variety of businesses that are in the health care supply chain, and I think that will cast some doubt on acquisitions prior to understanding the political outcome this year. For more on how the elections will impact the middle-market, see In Electiion Year, ACG Focuses on D.C. There’s obviously an elevated consciousness around global terrorism, but I think the political outcome this year is actually less important regarding that. Regardless of whether a Republican or a Democrat wins, I think the budgets, and C-level priority, for government agencies and companies around cybersecurity, data security, national security—those are all rising in terms of their importance. For more on trends in the cybsecurity space, see Hacking Drives Cybersecurity deals. Regardless of the political outcome, I think there will be significant demand for businesses that provide products and services that help governments or corporations that manage security risks.
What do you forecast for deal flow in 2016?
I think private equity firms will be substantially more active this year than last year, unless markets continue to go off a cliff, and then they’ll continue to wait and pause. Unless the markets are cratering all year long, I think the big pause that a lot of private equity firms took last year will end. A lot of them have a lot of capital that they raised last year or in 2014, and if the broad equity markets are down 15 percent to 20 percent this year, it will allow them to become active again, because they will be able to price and win deals at valuations that they are more comfortable with.
What trends in the private equity industry are you seeing?
There’s a constant and secular trend where more and more people are setting up their own boutique investment banks and private equity firms, where they’re doing deals on a deal-by-deal basis and they’re not raising funds. That’s been a trend for one or two years now, and I think that trend is going to continue to gather steam. The number of professionals who leave a blue chip financial institution and set up their own two-person, five-person operation, and become customers of Axial, that number is just continuing to become a larger and larger percentage of the customers that we serve. I think there’s two things driving that: The preference of limited partners to invest on a deal-by-deal basis is very high right now, versus committing to blind pools of funds for 10 years. It’s also becoming easier to do deals. It’s an easier transaction with the transparency and technology that’s making its way into the marketplace, and that allows new entrants to enter more easily. The amount of connectedness that the market has today, the ability to go online and to use Axial or use other tools to find people; to identify companies; to understand how those companies are doing; to quickly ascertain who do you need to meet, who do you need to do business with, who’s most active in the markets where you want to be transacting-- that information has been completely under lock and key for the last hundred years, and it’s really changed in the last five, six, seven years. You don’t need to build big, monolithic organizations in order to do transactions in the private markets anymore.