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Even with the landmark $1.3 trillion 2021 infrastructure bill under its belt, the Biden Administration returned to Congress this summer to ask for more money to repair Maryland’s critically damaged Francis Scott Key Bridge. The lack of available federal funds underlines how empty governmental coffers are and how much more is needed for infrastructure repair.

The backlog of crumbling bridges in the United States is immense, the shortfall of funding to replace them is severe, and the federal government is in no position to fill the breach. It’s finally time for governors and mayors to seriously consider private capital funding as a solution for their dire infrastructure needs.

It’s a whispered truth of American life: our roads and bridges are crumbling after decades of massive use but financial neglect. Our interstate highway system—once the envy of the world—has been graded a C by the American Society of Civil Engineers. We’ve got similar problems with our schools and public buildings, the need to upgrade our electric grid, the physical infrastructure of our aging postal system, and much more.

In the United States, when an elected leader suggests bringing in private funding for public projects, they’re shouted down.

The scale of the problem is simply too big for the government to handle on its own. Luckily, the rise of institutional private infrastructure funds over the past 40 years has created an industry with more than $4.5 trillion under management. Private infrastructure—in which private investors fund the infrastructure needs of public communities and earn returns from user and lease fees—is a proven and obvious solution if our elected officials are courageous enough to explore it.

Private infrastructure funding turns the entire cost and risk of select public capital projects over to private investors, bringing the private sector’s cutting-edge knowledge, experience, and project management skills to bear on the construction of the asset itself. This approach eliminates the financial burden on taxpayers while avoiding asking local governments to manage a project about which they often have little knowledge or experience.

These funds — whose investors include pension funds, university endowments, private companies, and individuals — fund and manage the cost of building or repairing bridges, schools, and other public infrastructure elements and collect returns via tolls, lease agreements, and cost efficiencies.

Private infrastructure is unencumbered by many of the structures governments have put on themselves.

In the United States, when an elected leader suggests bringing in private funding for public projects, they’re shouted down. Yet traditional tax-funded infrastructure repair and creation have proven simply insufficient. Tax revenues fail to meet communities’ infrastructure needs, and estimates have put the cost of bringing our infrastructure up to modern standards at multiple trillions of dollars—an amount that dwarfs our often-criticized defense budget and, yes, even our latest infrastructure bill.

Private infrastructure brings together deep-pocketed investors and those with the know-how to build projects on time and on budget. By comparison, what’s the last major public infrastructure project you know of that was created without significant delays and astonishing cost overruns?

Boston’s Big Dig was almost 600% over budget. California’s High-Speed Rail is expected to be at least 300% over budget, but it’s so early in the project that the overrun will almost certainly grow. Even the more modest Gordie Howe Bridge between the United States and Canada is now expected to come in at 127% over budget.

Private infrastructure, meanwhile, is unencumbered by many of the structures governments have put on themselves. Instead of needing several departments’ approvals, private infrastructure can act with the same alacrity and speed as a private business. It uses the same steel suppliers and union laborers the government would use but without the time delays and cost escalation that multiple levels of overhead and political maneuvering that regularly plague government-led infrastructure projects.

Governmental leaders must tell citizens the truth: the money doesn’t exist for these repairs, and time is running out to get them done.

Moreover, passing the cost and the risk entirely over to private infrastructure groups means that these groups are incentivized to get the project up and running faster. Every day that a highway remains under construction, or a power plant is not completed is one more day that their investors aren’t making a return.

Experience is an often-overlooked element of managing a major capital project, but it’s an absolutely essential one. Some needed projects are very complex and should be tackled by well-trained experts. There is a world of difference between filling a pothole — something public works departments have experience doing and city councils and departments of transportation have experience overseeing — and building or repairing a major transportation route.

Our present infrastructure isn’t going to hold up to the demands of modern society without taking dramatic action. We need governmental leaders – at every level – who are willing to tell citizens the truth: the money doesn’t exist for these repairs, and time is running out to get them done. Waiting for the next bridge collapse to respond is not a sign of good government decision-making or leadership.

Citizens should have the ability to hear about these hard truths and make informed decisions about the future of their infrastructure — whether they opt to use private infrastructure funds or not.

About the Author
Bob Hellman has spent his career developing private infrastructure solutions. He is the CEO of American Infrastructure Partners, a firm that connects public infrastructure funding needs with private investors.

Mr. Hellman has been a private equity investor for over 35 years, founding American Infrastructure Partners in 2018, and co-founding its predecessor company, American Infrastructure Funds, in 2006.

American Infrastructure Partners is headquartered near San Francisco in Foster City, California.

© 2024 Private Equity Professional | September 24, 2024

Selling an individual or family-owned private company used to be like hitting a golf ball. Today it’s more like swinging at a 98-mph, split-finger fastball.

If investment bankers were beginning a sale assignment in 2010, they would ask the business owners to share information on past exchanges with potential buyers. The clients would turn over a few emails or letters and recount a couple of trade show conversations that amounted to, “Call us if you’re ever ready to talk.”

That is not how that conversation goes today.

Changed Buyer Behavior Results in a Changed Seller Mindset

The approach of many business owners before a sale has changed in response to sweeping changes in how buyers choose to address the prospective seller universe. These changes include:

Greater imperative to avoid auctions through direct owner contacts
Financial as well as strategic buyers learned that if they waited until a desirable property was ready for market and began on an equal footing with competing buyers, it was harder to differentiate themselves and easier to end up as a price taker.

Profusion of deal generation tools
An in-house business development function in private equity is a development of the past 30 years. Today, a sophisticated middle market firm sees an in-house business development person or team as just one tool among many. Outsourced business development firms, analytical services, and deal flow advanced by independent sponsors are all in the mix. 

More ways to connect
In 2010, an owner or manager not ready to sell could simply instruct their team to ignore outreach from bankers, brokers, or potential buyers. These shutdowns were relatively effective—it often meant just not returning calls or discarding letters. It’s much more difficult today to remain disconnected from the broader M&A ecosystem.

More businesses in financial hands
It is one thing for a private equity firm to tell the owner of the Acme Safe Company, “Let us tell you how great our firm is.” It’s far more powerful to say, “We own Ajax Safe. We live in your world. Let’s talk.” Deal activity in more and more industries is dominated by strategic buyers who happen to be owned by financial firms.

More complex valuation metrics
Private company valuation has become both less and more complex. Buyers still perform discounted cash flow analysis, but – particularly for relatively straightforward B/B+ properties – can advance further based on a discussion of multiples of EBITDA and similar benchmarks. I’ve written before about the countervailing change in the assessment of more complicated and more desirable businesses. Buyers being asked to pay double-digit multiples are more likely to want to do a bottom-up analysis of production or sales trends. Consequently, for these companies, it’s much harder for an owner to have a clear sense of market value without engaging with prospective buyers and intermediaries. 

Migration of non-public market intelligence sharing down market
In 2006, Graeme Frazier and I launched GF Data, focusing on collecting and selling data on private transactions up to $250 million. Under ACG’s ownership, that threshold has since increased to $500 million. At the time, our primary competition on larger deals wasn’t the major data providers but the free information offered by larger investment banks. Over the past decade, increased specialization among investment banks in specific verticals has extended this capability down-market in certain niches.

Greater awareness of investments involving an ongoing role
For business and personal lifestyle reasons, more sellers choose to transact when they have something left in the tank. Correspondingly, more investment vehicles are targeting minority or non-controlling equity investments, and deal professionals on both sides have gotten better at constructing continuing ownership and employment roles. Business owners understand the shift and – given the prospect of an ongoing relationship rather than a “clean getaway” – are more open to getting acquainted in the run-up to a sale.

Changed Seller Mindset Results in a Changed Sale Process

So, back to the 98-mph splitter versus golf ball on a tee. An investment banking team encountering a private business ownership group considering a sale is much less likely to have that one-time data dump on prior interactions today.

Depending on the business and the industry, the ball will likely be in motion in five ways.

(1)  More prior contacts for the sell-side bankers to assimilate into their process.

(2)  More sharing of high-level information prior to launch.

(3)  More preemptive due diligence based on particularized buyer requirements (as opposed to generalized financial preparation).

(4)  More targeted processes.

(5)  More businesses choosing to forego out-bound marketing but willing to share their exit requirements with qualified inquiring parties.

All of this adds complexity to the trajectory and timing of a sale controlled by an individual or individuals rather than an institution. Rather than resisting these trends, Greenberg Variations Capital has built a business on rolling with them.

About the Author
Andy Greenberg is CEO of Greenberg Variations Capital, a mergers & acquisitions advisory firm based in suburban Philadelphia devoted to one-off or targeted transactions. Mr. Greenberg was founder and CEO of GF Data©, the M&A data tracking service, prior to its acquisition by the Association for Corporate Growth in 2022. For more information, visit www.greenbergvariations.com.

© 2024 Private Equity Professional | September 10, 2024

The Dynamic World of Private Credit
Reflecting on the past eighteen months, it’s hard not to be reminded of the old saying, “The only constant in life is change.”

The rapid pace of change and disruption in the credit markets has been reminiscent of the Global Financial Crisis. The commercial bank and broadly syndicated markets have shifted abruptly — especially in the middle market — leaving traditional lending as a less viable option for the average middle-market borrower. While these markets have begun to reopen recently, the landscape has been forever altered.

The void left behind by commercial banks and syndicated markets was a tremendous opportunity for private credit. Direct lenders stepped up to fill the gap – and take market share – in a manner that not only provided borrowers with necessary capital but also captured the hearts and minds of the market. Direct lenders gained market acceptance as the more straightforward and predictable alternative to the broadly syndicated markets.

To be abundantly clear, debt placement is not something private equity firms can’t do — on the contrary, it’s been a part of their business model from the start.

The private credit landscape is clearly more dynamic now than at any time in the past. As the asset class has grown, existing direct lenders have increased assets under management, typically also increasing hold size. In addition, new direct lenders have also entered the market at an unprecedented pace. While some new direct lenders are entering the lower end of the middle market, many have debuted with $1 billion plus inaugural funds.

The frenetic changes in the private credit landscape have led private equity firms to face a hard truth when it comes to sourcing financing — the days of approaching a discrete number of key relationship lenders to achieve best execution in debt financing seem to be in the rearview mirror.

Financing as Table Stakes
To be abundantly clear, debt placement is not something private equity firms can’t do — on the contrary, it’s been a part of their business model from the start. The typical debt financing strategy employed by private equity professionals involves a limited outreach to select relationship lenders.

Although this approach tactic does not offer a true “market test” of terms, it has worked reasonably well in the past — especially in the world of cheap and abundant debt capital. In that environment, the market was relatively efficient, and terms were more or less consistent across direct lenders.

Staying abreast of market appetite at a lender-by-lender level is key to finding the right lender.

In today’s capital markets, which are less efficient and more dynamic, broader outreach is critical to ensure optimal execution. Best execution (and best terms) means finding the right lender for the right opportunity at the right time.

This requires extensive outreach to the right group of lenders —including some brand-new lenders. While it is certainly possible for private equity to execute this plan on their own, it is often not the best use of time for these professionals. In the “higher-than-longer” interest rate environment, sponsors are increasingly focused on value creation strategies at the portfolio company level to drive returns. It is not typically in the best interests of a private equity firm to allocate the internal time and effort required to run a debt placement process. Those resources are best deployed elsewhere — finding the best management team, identifying potential add-on acquisitions, setting portfolio company operating strategy, and a host of other value creation efforts.

Finding the Right Lender…
Staying abreast of market appetite at a lender-by-lender level is key to finding the right lender. The rapidly evolving lender ecosystem requires full-time effort and constant activity in the market. This real-time intel is the only way to effectively navigate and create a healthy competitive dynamic amongst lenders in a debt placement process.

Identifying the right lender at the right time depends on the lender’s current risk appetite — whether they are ‘risk on’ or ‘risk off.’

The right lender for a given portfolio company is often not the last lender to do a deal with the same private equity firm. Instead, the right lender is a function of the borrower’s credit profile. Increasingly, direct lenders have been selecting industries and even subsectors where they will be more aggressive. Conversely, a lender that happens to have a troubled borrower in a given industry may be leaning out of that industry.

The level of effort required to constantly monitor lender activity is not feasible for most private equity professionals as they are typically balancing other higher value creation activities.

…At the Right Time
Identifying the right lender at the right time depends on the lender’s current risk appetite — whether they are ‘risk on’ or ‘risk off.’ This is further complicated in an ecosystem that is changing as rapidly as private credit is evolving. New lenders are being formed on a near-weekly basis, and Configure data shows that 60% to 75% of the most active lenders are replaced by a new cohort of active lenders every six months.

As new lenders raise funds and enter the market, they are under pressure to deploy capital, creating a pronounced “risk on” posture. Conversely, lenders who are actively fundraising or in the late stages of their fund may be more “risk off” over that period of time. The ebb and flow of individual risk appetite within the broader ecosystem of private credit further reinforces the necessity of constant market activity.

The Growing Case for Outsourced Debt Placement
There are two primary factors that contribute to the best execution in a debt financing: real-time knowledge of the market and appropriate breadth of outreach.

Real-time knowledge and market intelligence about the lender ecosystem and behavior form the basis for determining which lenders should be contacted for specific opportunities. Constant transaction activity is the only way to truly know the market. Most private equity firms evaluate between three and seven financings in a given year — a combination of new platform financing and portfolio company refinancings. To put this in perspective, Configure is engaged on 30 to 50 debt placements in a given year. This depth of market intelligence is impossible to create synthetically.

If each lender needs an hour of time — not an unreasonable request — then the time commitment begins to approach that of a full-time job – beyond the already full-time effort of getting a new transaction to close.

Appropriate breadth of outreach is also critical to a true market test and this breadth is directly informed by real-time market knowledge. The “appropriateness” of the breadth of outreach can be violated in both directions — too broad or too narrow. The objective is not to email blast a large set of lenders and wait to see who responds, nor is it the objective to select and approach only a handful of lenders. The objective is to identify the right set of lenders who are high probability and then provide those lenders with the time and effort necessary to address their questions and help them understand the opportunity.

The outreach itself can be time-consuming and often difficult to manage with a private equity sponsors team during the storm of activity involved in closing a transaction. Compounding this time pressure is the necessity to dedicate time and effort with each lender to answer questions, ensure they understand mitigants to key credit concerns, and address a multitude of other important lender questions.

If each lender needs an hour of time — not an unreasonable request — then the time commitment begins to approach that of a full-time job – beyond the already full-time effort of getting a new transaction to close. As the process moves into management presentations with lenders, negotiating term sheets, and ultimately credit agreement and documentation, the time commitment only builds, distracting from higher value-add activities along the way.

Many private equity firms have realized that the considerable investment of time and resources required in a financing process does not deliver an appropriate return. Reallocating those resources to evaluate and close more deals or to improve profitability at portfolio companies is more effective at driving returns and fund performance.

The Configure Difference
Configure Partners is a credit-oriented investment bank specializing in debt placement. The firm provides the highest level of client service and execution to middle-market private equity sponsors in acquisition finance, refinancing, and dividend recapitalization transactions.

Configure is one of the largest firms dedicated to debt advisory. We’ve developed our processes and systems to ensure execution across all types of financing transactions. Unlike other debt placement groups, we don’t treat debt advisory as a secondary service offering to M&A – debt placement is our entire business.

As previously stated, private equity firms often rely on a “relationship” lending approach, typically limiting outreach to a discrete set of lenders that have financed other portfolio companies. Make no mistake: relationships are critical and Configure takes great care to include relationship lenders in the outreach in a manner that is respectful of the existing relationships.

Of course, the pressure of a competitive process often encourages relationship lenders to tighten up on terms to secure the deal. It’s not unusual for a competitive process to drive both increased leverage/proceeds and reduced economics in the form of reduced original issue discount (OID), lower interest rates, lower fees and other areas of savings. At the end of the process, the private equity firm or borrower is able to compare proposals from the set of relationship lenders alongside proposals from new lenders and determine the preferred solution.

This holds true in refinancing engagements as well, where the incumbent lender is typically assumed to be the “best” answer. A broader, competitive process almost always results in a materially improved refinancing proposal from the incumbent lender. Sometimes, the improved proposal of the incumbent lender is determined to be the best solution; sometimes, a new lender will displace the incumbent. In both examples, the benefits of a financing process almost always outweigh the cost of the debt placement advisor. In fact, the fee paid to the advisor by the private equity sponsor or the borrower is typically recouped through improved financing economics in less than twelve months.

About the Author
Joseph Weissglass is a managing director at Atlanta-headquartered Configure Partners. He joined the firm in 2017 from Guggenheim Securities where he was a vice president in the firm’s special situation group. Earlier in his career he was with Barclays Capital in its restructuring and finance group. Mr. Weissglass has his undergraduate degree in construction science and management from Clemson University and his MBA from the University of North Carolina.

If the above article has sparked a question or thought concerning hiring an advisor for financing, please feel free to reach out to any Configure team members. Mr. Weissglass  can be reached via email at [email protected].

© 2024 Private Equity Professional | May 31, 2024

Greenside Capital Advisors has launched as a new independent investment banking boutique specializing in middle market sell-side and buy-side mergers, acquisition advisory and business valuation services.

Greenside Capital was co-founded by Eric Higgins and Bob Snape, former senior bankers at BDO Capital Advisors where they worked together from 2015 to 2024. During their careers, Messrs. Higgins and Snape have been involved in more than 200 sell-side mergers and acquisition advisory engagements with an aggregate $22 billion in transaction value. Their clients have included family and founder-owned businesses, Fortune 500 corporations, international conglomerates, and private equity firms.

“What makes us different is our hands-on approach, experience, and the breadth of our expertise,” said Mr. Snape. “Our former clients know that Eric and I bring a formidable team to the middle market, working on complex and innovative transactions with unparalleled efficiency and commitment, and a proven track record of delivering world-class outcomes. I couldn’t be more excited to build on this reputation at Greenside Capital.”

Greenside Capital specializes in six industry verticals: business services, consumer and retail, energy, environmental and infrastructure, healthcare and life sciences, manufacturing and distribution, and technology.

Specific areas of expertise provided by the Greenside team include advisory services that require specialized and customized support including corporate divestitures, mergers, acquisitions, restructurings, recapitalizations, ESOPs, fairness opinions, business valuations, and strategic alternatives reviews.

“We see a clear opportunity to provide superior investment banking services to clients that are either too small for bulge bracket firms or too complex for smaller investment banks,” said Mr. Higgins. “Greenside Capital combines the capabilities, relationships, and experience of a large global investment bank with the client service, attention to detail, and agility of an elite boutique firm.”

Greenside Capital is headquartered in Boston.

© 2024 Private Equity Professional | May 16, 2024

Amid a material drop in deal volume, the 2023 private M&A market is seeing more and bigger earnouts. Earnouts can help bridge valuation gaps as strategic buyers get more active. Higher interest rates and uncertainty over future Fed rate increases are key drivers in the disconnect of valuation expectations.

The 2023 M&A market to date is in many ways a continuation of 2022, with a few notable exceptions. U.S. public and private strategic buyers have a larger piece of the buy-side market share compared to the midpoint of last year. Buyers are using their equity more to finance acquisitions (more than two times the number of all stock deals compared to this time last year). There are double the number of deals with management carveouts (7.2% compared to 3.4% in 2022); although these carveouts are not quite as big on a median basis (7.2% of transaction value compared to 10% in 2022). But perhaps the most notable trend is the prevalence of earnouts in 2023 private M&A deals.

SRS Acquiom has observed a 62% increase in the number of deals with earnouts in 2023.

Buyers active in the 2022-2023 M&A market are strategically opportunistic in selecting potential targets and thoroughly diligent throughout the dealmaking process. This appears to include a focus on smaller (and more likely domestic) acquisitions, which may also have the added benefits of avoiding regulatory scrutiny and a reduced need for interest rate sensitive financing. Gone are the fast-paced, high-value, relatively seller-favorable deals of 2021, at least for now.

Nonetheless, many sellers struggle to accept that the value of their business has declined, especially if it continues to perform well. Hence, the valuation disconnect. Heavily negotiated earnout provisions can sometimes help get the parties across the finish line. This is manifesting itself in the data. SRS Acquiom has observed a 62% increase in the number of deals with earnouts in 2023. Nearly one-third of 2023 deals (excluding life sciences deals) have an earnout, compared to 21% in 2022 and 17% in 2021.

In addition to frequency, the amount of deal consideration tied up in earnouts also went up. Prior to the pandemic, the median size of earnouts was approaching as low as 18% (as a percentage of the up-front consideration paid at closing) and for the last two years, plateaued around 30% after a COVID peak of 38% in 2020. 2023 deals with earnouts come in higher—somewhere north of 40% to date.

18% of deals with a private-equity fund as the buyer included an earnout, compared to 30% of deals with a U.S. public buyer.

The shifting of the legal terms of the earnout provisions is another sign that parties are working hard to get these deals across the finish line. This is an area where strategic buyers may be leading the way. Only 6% of 2023 deals with an earnout included a covenant that buyers operate the target business in accordance with past practices, compared to 23% in 2022. Some decrease here makes sense given the higher number of strategic buyers, whereas financial buyers are more likely to keep the target’s existing management team in place and, therefore, more often agree to this operational covenant language. However, given this significant decrease (nearly 75%), the increase in strategic buyers is likely not the only factor driving this shift in earnout provisions.

Interestingly, frequency of certain efforts language for earnouts held steady with about 85% of deals in both 2022 and 2023 including language along the lines of “Buyer shall not take any actions the primary purpose of which is to prevent achievement of the milestone payment.”  Nearly 40% of 2023 deals included “commercially reasonable efforts” (CRE) language, compared to 30% of 2022 deals. Strategic buyers are more likely to agree to CRE language, and the higher percentage of strategic buyers in 2023 likely explains most or all the increased inclusion of a CRE standard.

There is optimism for increased deal activity in the fourth quarter among M&A practitioners. 

Generally, financial buyers tend not to push for earnouts as often as strategic buyers. For example, in 2022, 18% of deals with a private-equity fund as the buyer included an earnout, compared to 30% of deals with a U.S. public buyer. The slow return of strategic buyers to the M&A market in 2023, valuation gaps, low deal volumes, and macroeconomic conditions are all factors driving more and bigger earnouts.

It is important to note that early trends in deal-term data may not hold going forward, particularly with optimism for increased deal activity in the fourth quarter among M&A practitioners. Time will tell. For now, we know the first part of 2023 saw a higher prevalence of earnouts on private M&A deals, as deal parties found ways to close deals in a tough market.

SRS Acquiom is a provider of services used for the administration of complex financial transactions including paying and escrow agent services, online document solicitation and reporting, professional shareholder representation, and virtual data rooms. In addition, for loan and credit transactions, SRS Acquiom provides independent administrative, collateral, and sub-agent services. SRS Acquiom was founded in 2007 and is headquartered in Denver, Colorado.

About the Author
Kip Wallen is a senior director leading the SRS Acquiom thought leadership practice. He leverages his extensive expertise and SRS Acquiom proprietary data to produce resourceful content regularly utilized by market practitioners. Kip has broad experience in M&A and provides guidance on market standards and trends.

Previously, Mr. Wallen was a Director with the SRS Acquiom Transactional Group, where he collaborated with clients and counsel to negotiate M&A documents including purchase, escrow, payments, and other transactional agreements. Before joining SRS Acquiom, he was an attorney with a Denver-based boutique business law firm where he assisted clients with M&A transactions as well as general corporate governance and securities matters.

© 2023 Private Equity Professional | October 17, 2023

The Lincoln Private Market Index (LPMI), which tracks changes in the enterprise value of US privately held companies, increased by 1.5% during the first quarter of 2023.

According to Chicago-headquartered investment bank Lincoln International, growth in the LPMI was driven by operating performance rather than multiple expansion. While the LPMI increased, the rise was mild in comparison to the S&P 500, which grew 8.2% during the first quarter. Both indices grew despite headwinds, including the collapse of Silicon Valley Bank in March, which led to a modest pullback in the S&P 500. Since Q1, however, the S&P 500 has rebounded to levels seen in February before the pullback.

From the inception of the LPMI in 2014, changes in the index have conformed with changes in the S&P 500. While the changes in the LPMI have been less volatile, the two indices have converged in multiple quarters, including Q1 2023. As of Q1 2023, the LPMI and S&P 500 sat nearly on top of each other, with the LPMI growing 52% since inception and the S&P 500 growing 51% over that period.

Leverage continued to decrease on new deals as interest rates continued to rise, with leverage clocking in at its lowest level in the last two years at 4.8x.

“Fundamental performance, rather than multiple volatility, is the primary driver of value in the private markets, and private equity appears to have done a good job of navigating the current inflationary and recessionary pressures,” said Steve Kaplan, a professor at the University of Chicago Booth School of Business, who assists and advises Lincoln International on the LPMI.

Amid Growing Market Share, Direct Lending Remains in a Period of Price Discovery
While 2023 has been off to a slow start from an M&A and lending perspective, there has been a stark contrast between activity in the broadly syndicated loan (BSL) market and the direct lending market. Nearly all M&A financing in 2023 has been done through the direct lending market rather than the BSL market, including transactions that previously may have been done in the BSL market due to their size. In addition, among other factors, the collapse of Silicon Valley Bank has led to a shift away from bank-led financing towards direct lending (non-bank lending). In an uncertain environment, borrowers prefer the certainty of execution that direct lending brings, despite its higher cost of borrowing.

Based on data from Lincoln’s database, the average spread on new direct lending issuances was 6.6%, marking the second quarter in a row that the average new issuance spread was greater than 6%. This was an increase of approximately 0.50% from the prior year. Lastly, leverage continued to decrease on new deals as interest rates continued to rise, with leverage clocking in at its lowest level in the last two years at 4.8x.

“The direct lending market is at a bit of a crossroads at the moment,” said Ron Kahn, a managing director and co-head of Lincoln’s valuations and opinions group. “Interest in the asset class remains strong and credit terms have remained favorable for lenders; however, as rising rates persist, all-in yields can only remain in the mid-teens for so long. At some point something needs to break—either cracks start to form and defaults jump up or spreads start to move in the opposite direction to ease interest burden on PE portfolio companies.”

Private Company Growth Continues into Q1 but Will It Last?
Q1 2023 represented another quarter of resilient performance by PE-backed portfolio companies, despite continued inflationary pressures which spurred beliefs that private company performance could take a turn for the worse. Approximately 81% of companies tracked in Lincoln’s private market database showed LTM revenue growth for the period ending March 31, 2023, as compared to the period ending March 31, 2022. However, only 61% of companies exhibited LTM EBITDA growth over that same time. These figures compare to four-year averages of 66% and 55%, respectively. It should be no surprise that given the gap between revenue and earnings growth, EBITDA margins have contracted 2% year-over-year.

Private companies have been able to largely handle the curveballs thrown at them in 2022 and, looking ahead, it appears as though portfolio companies and sponsors are expecting that growth to continue.

For the full year of 2023, private companies are projecting an average revenue and EBITDA growth of 10%. This perhaps suggests that the margin contraction experienced in 2022 is expected to tail off, but at the same time, margins are not expected to expand in the near term. Lastly, it remains to be seen if this EBITDA growth is achievable. Since the inception of the LPMI, there has not been a year in which EBITDA growth has reached double digits.

Unsurprisingly, companies in the consumer industry have displayed the weakest performance recently, with LTM revenue growing approximately 12% from the year prior and LTM EBITDA declining 2% over that same timeframe.

“Private companies have been able to largely handle the curveballs thrown at them in 2022 and, looking ahead, it appears as though portfolio companies and sponsors are expecting that growth to continue,” added Mr. Kahn. “However, market participants remain cautious if this growth can be achieved and as a result, there has been a marked slowdown in M&A activity in the early innings of 2023.”

The LPMI was launched in 2020 and measures the variation in private companies’ enterprise values by analyzing the aggregate change in company earnings as well as the prevailing market multiples for approximately 800 private companies – primarily those owned by private equity firms – each generating less than $100 million in annual earnings. The index is calculated using anonymized data on an aggregated basis by Lincoln’s valuations and opinions group.

The methodology used by the LPMI was organized by Lincoln in collaboration with Professors Steven Kaplan and Michael Minnis of the University of Chicago.

Follow this LINK to see the full Q1 2023 Lincoln Private Market Index report.

Lincoln International provides mergers and acquisitions advisory, private funds and capital markets advisory, and valuations and fairness opinions. The firm is headquartered in Chicago and has more than 20 offices in 15 countries.

© 2023 Private Equity Professional | May 19, 2023