Rob White is a Managing Director at the Investment Banking division of M&T Bank. He is an investment banker with the group and was a leader in the development of a service line focusing on middle market M&A and corporate finance transactions. Below is a Q&A with White about his experiences in middle market M&A and some of the current industry dynamics.
What are some of the broader trends you’re seeing in middle market M&A?
While we saw reasonably strong deal activity from 2010-2012, in 2013, tax rate increases and federal government dynamics combined with macroeconomic challenges to cause a tightening in the M&A market. Many sellers pulled back and buyers became cautious. However, in the spring of 2014, we saw middle market M&A activity pick up considerably. The economy pushed through the issues of 2013, the public markets continued to rise and inexpensive and abundant debt capital provided the opportunity for aggressive buyers to pay higher multiples and lure sellers off the sidelines. This active M&A market has persisted through 2016.
Over the past several years, we have seen significant demand from acquirers. Strategic buyers, especially publicly traded companies, have amassed cash on their balance sheets and are looking for areas to deploy this capital and ways to grow in the face of relatively lackluster GDP growth. The continued evolution of private equity and other institutional capital – highly motivated, disciplined and competitive buyers with a limited time horizon – has added to the mounting demand in the market place. Combine all these buyers with the abundant availability of bank debt and other forms of non-traditional financing, and you have the recipe for high multiples and attractive valuations.
One trend that has become evident in this post-recession era is the lengthening of transactions. Buyers are more thorough with diligence, which has resulted in longer deal processes. Well-run companies with clear differentiators, strong infrastructure and solid reporting are attracting multiple suitors, a myriad of transaction options and strong valuations. And as importantly, these sellers can typically produce the necessary data and analyses to facilitate an efficient and seamless process, expediting the time to close and helping to ensure there are no changes in the transaction value and structure along the way. Conversely, companies that are unprepared for a process or not as attractive to the markets can have great difficulty in successfully completing a transaction and may find that valuations not as lofty as expected.
Do you expect deal activity to remain robust 2017?
In the near-term, we expect strong market conditions and continued opportunity for our clients to sell or raise capital. We believe there remains a significant amount of capital that needs to be put to work. While a small bump in interest rates may increase the cost of capital slightly, this is less significant than the availability of debt capital. Assuming banks and non-bank lenders continue to provide senior debt to these transactions, we believe the strong market trends will continue. While the changing political administration creates some uncertainty, absent something unexpected early in the new term, we don’t believe this will affect the markets in the short run.
How is the private equity industry changing?
The private equity community has grown and changed dramatically over the past 10-15 years. Record amounts of capital have been raised and continue to be raised every year. This capital must be invested and returned to investors within a defined time period.
This influx of capital and the associated overhang of uninvested funds not only adds aggressive, well-funded buyers to the market, but has led to many more transaction opportunities for our middle market clients. To differentiate themselves from competing funds, private equity and other institutional capital have adopted new fund strategies, like minority investments or growth equity investments. Business owners looking to sell have more options available to them than they may realize and an investment banker with a well-run process can help these business owners understand those opportunities and the tradeoffs between different transactions.
Another more recent change in the industry is the growing influence of family offices – private wealth management firms that are established to manage the personal wealth of an affluent individual or family. While family offices have been around for some time, we have seen substantial growth and more formalization of the direct investment side of these offices. Many family offices have hired private equity professionals to manage their direct investment efforts and oversee the ensuing portfolio. Family offices can provide a nice alternative to private equity funds for certain middle market business owners. These funds do not typically have a time horizon on their investments and their return requirements may be less than a typical private equity fund.
Are there any interesting transaction trends that you have seen lately?
We engage in a wide variety of transactions, from sell-side M&A to growth capital raises. As such, we see natural cycles where certain transactions are in favor based on the general environment. With the lofty multiples of late, the majority of our transactions since 2014 have been straight sell-side M&A, often to strategic buyers. Interestingly, in 2016 we have done a disproportionate number of carve-out transactions, whereby we assist a client with the sale of a piece of its business, not the entire operation. In most cases, our involvement was triggered by unsolicited interest in our clients from strategic acquirers, including publicly traded companies and private equity backed platforms. Carve-out transactions can be a great way for buyers to surgically add to their businesses without purchasing an entire business and for sellers to take advantage of the lofty valuation environment and divest non-core assets while still maintaining ownership of their businesses.
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