Archives for September 12, 2019

Seller’s Market, Seller’s Rules

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Seller-friendly positions on deal points continue to accompany favorable economics in this sustained seller’s market, according to GF Data’s Fall 2019 Key Deal Terms Report.

Two hundred private equity sponsors and other acquirers reported to the data tracking firm on transactions completed in the $10 million to $250 million Total Enterprise Value (TEV) range.

The average cap on indemnification against breaches of representations and warranties was 9.8% in the first half of 2019, following a rise to 15.0% last year.

“We keep a close watch on key deal terms as leading indicators of a market shift,” said Andrew Greenberg, CEO of GF Data. “Buyers will clamp down other deal points prior to extracting concessions on price. For now, it remains a seller’s market all the way down the term sheet.”

GF Data’s key deal terms report also tracks the increasing usage of representations and warranty insurance (RWI) over the past few years, and differentials between transactions completed with an insurance product and those completed without.

Use of an insurance product continued to rise, but after the dramatic proliferation of RWI from 2016 to 2018, the curve has begun to flatten.  According to the report, RWI utilization overall was about 53% year to date, up from 52% in 2018.   The use of RWI by transaction size also tended to stabilize – in the 25% range at $10 million to $25 million TEV; 50% to 60% at $25 million to $50 million; and 75% to 80% at $50 million to $250 million.

“The valuation spread on deals completed with and without RWI has remained steady year-over-year,” said B. Graeme Frazier, IV, GF Data’s co-founder and principal. “Deals featuring an insurance product were completed at an average valuation of 7.8x in the first six months of this year – the same as in 2018.  In both years, this was about a turn ahead of the average for non-RWI transactions. It seems clear that this spread represents both cause and effect – better businesses are able to secure RWI and then the insurance coverage has some protective value to buyers.”

In addition to data on indemnification caps, the Key Deal Terms Report also covers the impact of earnouts and seller financing, escrow/holdback incidence and duration, and basket amounts.

“In recent competitive processes for quality companies, the negotiation over general indemnification limitations is occurring within a narrow band and tends to be resolved quickly,” said Mark Witt, an attorney in the mergers and acquisitions group at Godfrey & Kahn in Milwaukee. “Most of the bargaining capital on indemnification issues is being used to address known risks and liabilities that either are not covered by an RWI policy or that the buyer otherwise perceives as inconsistent with its valuation.”

GF Data provides reliable external information for use in valuing and assessing M&A transactions to private equity firms, investors, lenders and other users.  The firm collects and publishes proprietary transaction information from private equity groups on a blind and confidential basis.  The pool of active contributors comprises 200 private equity firms, mezzanine groups and other financial sponsors. Data contributors and other subscribers receive five products: (1) a quarterly report containing high-level valuation, volume and leverage data; (2) a quarterly supplement offering detailed information on debt and capital structure trends; (3) a semi-annual supplement on indemnification cap, escrow and other details; (4) quarterly industry drilldown reports; and (5) continuous access, through GF Data’s secure website, to detailed valuation data organized by NAICS code.

For information on subscribing or on contributing data as a private equity participant, please contact Bob Wegbreit at [email protected] or 610-616-4607.

GF Data is based near Philadelphia in Conshohocken, PA (www.gfdata.com).

© 2019 Private Equity Professional | September 12, 2019

GT Adds Restructuring Pro

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Grant Thornton has hired Bill Fasel as a managing director in the firm’s strategic solutions practice which evaluates financial and operational issues affecting underperforming companies.

Mr. Fasel has more than 25 years of advisory experience assisting multinational and middle-market clients with corporate restructuring, business transformation, corporate finance and strategic planning. He has provided a range of business advisory and transaction services to companies, debtors, lenders, unsecured creditors and private equity firms.

In his new position with Grant Thornton, Mr. Fasel will provide turnaround and restructuring, operational improvement and transaction advisory services to underperforming and distressed companies and their creditors, lenders and other related groups.

“Bill’s extensive experience serving clients across a variety of industries on business plan and corporate strategy development, turnaround initiatives and crisis management will be key to augmenting our restructuring capabilities both locally and nationally and driving strategic growth,” said Scott Davis, national managing partner of financial advisory services at Grant Thornton.

Before joining Grant Thornton, Mr. Fasel was a managing director in the Chicago office of Riveron Consulting from 2018 to 2019 where he co-led efforts to establish and manage a recovery and transformation services practice. Earlier in his career, he held senior positions with PwC’s business recovery services practice (2013 to 2018), Deloitte’s corporate advisory services group (2008 to 2013), and Mesirow’s consulting practice (2006 to 2008). Mr. Fasel earned his MBA from Northwestern University and his BBA in finance from the University of Michigan.

Grant Thornton’s strategic solutions practice evaluates the financial and operational issues affecting underperforming companies in order to determine strategic alternatives. Founded in Chicago in 1924, Grant Thornton is the US member firm of Grant Thornton International, one of the world’s leading audit, tax and advisory firms. The firm has revenues in excess of $1.7 billion and operates 59 offices with more than 590 partners and 8,500 employees (www.grantthornton.com).

© 2019 Private Equity Professional | September 12, 2019

Cotton Creek Adds Staff after Fund Close

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Cotton Creek Capital has added two professionals to its investment team with the hirings of Josh Weaver and Nathan Zhu.  Mr. Weaver joins Cotton Creek as a senior associate and Mr. Zhu as an associate.

These new hires follow Cotton Creek’s final closing last month of Cotton Creek Capital Partners III LP with $215 million in capital commitments. Cotton Creek invests from $10 million to $40 million in companies with EBITDA between $5 million and $15 million. Sectors of interest include manufacturing, value-added distribution, industrial, specialty chemical, building products, food and beverage, and business services.

Prior to joining Cotton Creek, Mr. Weaver was an associate with CenterOak Partners beginning in 2016 where he focused on deal execution and portfolio company oversight in the industrial, consumer, and business services sectors. From 2013 to 2016 he worked in investment banking at Wells Fargo Securities. Mr. Weaver has his BS in financial management and investments from the University of Arkansas.

Mr. Zhu joins Cotton Creek from Duff & Phelps where he was an investment banking analyst working on mergers and acquisitions in the industrials, consumer and hospitality sectors. Mr. Zhu earned his BA in economics and engineering from Dartmouth College.

Cotton Creek’s new fund has already closed on three investments with the buys of Seatex, a Rosenberg, TX-based provider of chemical compounding and toll manufacturing for products used in the energy, cleaning, and industrial markets (acquired in November 2017); Young’s Communication, a Melbourne, FL-based provider of telecom and utilities infrastructure services (acquired in July 2018); and Vecta Environmental Services, a Gonzales, LA-based provider of industrial and environmental services to the chemical, industrial, utilities and oil & gas sectors (acquired in October 2018).

Cotton Creek is headquartered in Austin, TX (www.cottoncreekcapital.com).

© 2019 Private Equity Professional | September 12, 2019

HKW Loves its Fruits and Vegetables

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Fresh Direct Produce, a portfolio company of Hammond, Kennedy, Whitney & Company (HKW), has acquired Islands West Manufacturing. HKW acquired Fresh Direct Produce in December 2018.

Islands West is a family-owned wholesaler of produce, processed fruits, dried spices, and fresh-cut vegetables. Customers of the company include grocery stores, restaurants, hotels, hospitals, schools and government facilities. Islands West was founded in 1995 and is headquartered in Victoria, BC.

The buy of Islands West follows Fresh Direct’s July acquisition of Emperor Specialty Foods, a Richmond, BC-based distributor of mushrooms, pears, and other specialty fruits and vegetables.

Fresh Direct Produce is a distributor of more than 1,000 fruit and vegetable items, including fresh, ethnic, tropical, organic, and specialty produce, to the Western Canadian market. The company’s value-added services include ripening, grading, machine packaging, and bagging. Fresh Direct, led by CEO and co-founder Davis Yung, has three distribution centers, two in Vancouver (headquarters) and one in Calgary, with a total of 152,000 square feet.

“This acquisition meets several key objectives for Fresh Direct, offering our customers a range of complementary new products, a wider and more efficient distribution network, and a state-of-the-art processing facility, adding capacity and improving operations,” said Mr. Yung. “With a strong leadership team already in place, Islands West immediately provides the fresh-cut capabilities our customers want, while at the same time expanding our overall product offering and geographic reach.”

“We are very pleased to partner with an organization that has the talent and capabilities of Islands West. The expanded range of products and the offering of fresh-cut vegetables, allows for significant cross-selling opportunities,” said Kent Robinson, an HKW partner. “HKW’s emphasis on health and wellness remains a key area of focus; this add-on strengthens our commitment to that sector.”

Hammond, Kennedy, Whitney & Company invests in companies with revenues between $20 million and $200 million and EBITDAs between $2 million and $20 million. Since 1982, HKW has completed 60 platform management buyouts of small middle-market companies throughout North America as well as 66 add-on acquisitions. The firm was founded in 1903 and is headquartered in Indianapolis with an additional office in New York (www.hkwinc.com).

© 2019 Private Equity Professional | September 12, 2019