Since late 2013, dealmakers have been telling us they feel good about middle-market M&A in 2014. Midway through the year, the optimism remains in responses to the surveys Mergers & Acquisitions conducts each month. To gain some insight into why we should believe 2014 will be any different from 2013 - which after all was a down year - I turned to Stewart Kohl, co-CEO of the Riverside Co. (Scroll down for the video interview, or click here.)
Kohl is a veteran dealmaker. He and co-CEO Béla Szigethy won our Dealmakers of the Year Award for 2013. Over the 26 years Riverside has been in business, Kohl has seen plenty of economic cycles come and go.
Think of 2014 as the first "new-normal year," Kohl urges. "In 2008, the world turned upside down, and for 2009 and at least the first half of 2010, just about every market was disrupted. You couldn't accurately say what the value of a company was, or how much a lender would lend, or how much a limited partner would allocate to private equity, because everything was so disjointed," recalls Kohl.
Then, beginning in the second half of 2010, the markets slowly began to come back together. First, buyers and sellers began to agree on prices for companies, then the lending market started to revive, and finally, in 2013 the fundraising market rebounded.
In the first quarter of 2014, PE firms raised more money than they did in the same quarter for any year since 2008. "Water has found its level in 2014," says Kohl.
Why didn't M&A thrive in 2013, when many of the same fundamentals were in place?
One answer stems from the "bubble" created in the fourth quarter of 2012, when many M&A professionals sped up deal closings before the year ended to take advantage of low tax rates. After that surge to complete transactions, the first half of 2013 suffered. But by now, "that phenomenon has passed."
Another answer is more psychological in nature. Kohl calls it "soak time." People, he says, "can adjust to different levels, but it can't happen overnight. I think we've all been getting used to the new levels in the last few years."
Riverside enjoyed an active 2013, when the firm bought 22 companies and sold 11. But Kohl expects 2014 to be busier. "We're going to sell as many as 20 companies," says Kohl. "We're also going to buy a lot of companies."
Bad economic news could still throw a wrench into dealmaking, acknowledges Kohl. "Absent that, we'll see a very active second half of 2014 in M&A and therefore a strong year."