Strategy

Align Launches Independent Sponsor Strategy

by

Align Capital Partners (ACP) has announced the launched of a new independent sponsor-focused private equity strategy, Align Collaborate.

ACP founded Align Collaborate in partnership with independent sponsor investors, Grant Kornman and Michael Kornman.

Prior to forming Align Collaborate, the Kornmans co-founded NCK Capital, a Dallas-based lower-middle market independent sponsor that invests in companies with $2 million to $10 million in annual EBITDA that are active in business and industrial services, specialty distribution, niche manufacturing, for-profit education, food manufacturing, and healthcare. The Kornmans closed five platform acquisitions across a variety of industries during their time at NCK Capital. Joining the Kornmans at Align Collaborate is Associate Scott Weiss who worked with them at NCK Capital.

Align Collaborate’s sweet spot is $5 million to $30 million of equity per transaction in platform companies that have between $2 million to $15 million of EBITDA.

“Based on our prior experience at NCK, we understand the importance of helping independent sponsors answer the inevitable seller question – where does your money come from?” said Grant Kornman. “We are excited to be part of the Align Collaborate strategy, where our goal is to provide speed and certainty to what often is the most important deal of an independent sponsor’s career.”

In November 2022, Dallas and Cleveland-headquartered ACP held an above target close of its third fund, Align Capital Partners Fund III LP, with $620 million of capital commitments. This fund invests from $20 million to $60 million in North American-based companies that have from $3 million to $15 million of EBITDA and enterprise values of up to $150 million. Sectors of interest include software and tech-enabled services, professional business services, industrial services, specialty manufacturing and specialty distribution.

“We recognized the need for value-added equity capital for independent sponsor transactions,” said Michael Kornman. “Under the ACP umbrella, we aim to offer not only greater certainty of funding, but a partnership approach that combines our direct experience leading independent sponsor investments with growth resources from the ACP toolkit.”

“Align Collaborate is a great complement to ACP’s flagship fund strategy and our collective commitment to helping lower-middle market businesses grow. Our new strategy will allow us to have a dedicated team and equity capital focused on serving as a true growth partner to independent sponsors,” said Chris Jones and Rob Langley, the co-founders and managing partners of ACP, in a released statement.

Align Collaborate is headquartered in Dallas.

© 2023 Private Equity Professional | October 3, 2023

The Rise of Independent Sponsors

by

Today, most entrepreneurs have recognized that growing their company’s EBITDA to at least $3 million opens greater exit opportunities to financial buyers that just don’t exist below that threshold. For many private equity sponsors, a well-run, diversified $3 million+ EBITDA business is big enough to consider acquiring either as a platform or an add-on.

One reason why $3 million+ is big enough today is that we generally see entrepreneurs switching from using business brokers to sell their business to using lower middle market investment bankers. As investment bankers generally have larger networks and more efficient processes, that translates to a more efficient marketplace where more potential buyers (both strategic and financial) will see the company. Getting to $3 million+ in EBITDA gets you on the bottom rung of the all-important lower middle market ladder.

Most importantly, getting to $3 million+ opens up your company to many more financial buyers which can lead to competitive bids and hopefully larger sales multiples. For many years, that meant financial buyers generally consisting of funded private equity only, and specifically funds raising from $50 million to $500 million.

I believe the most dramatic change in the past ten years is that we’ve seen a wave of new independent sponsors.

By definition, an independent sponsor does not have a fund, rather they’re “fundless”. Many thought the “fundless” label would stop independent sponsors from winning many deals. But that just hasn’t been the case. Why not? Surely, it’s the result of many factors but I would contend it’s mostly due to that long-standing truth, incentives drive behavior.

Independent sponsors have truly increased the number of buyers in the room for lower middle market transactions. 

Independent sponsors are incented to find a good company and get it under letter-of-intent at a good price, since they don’t have any management fees or carry from a fund.

Oftentimes, we see independent sponsors acting like a sales force for funded sponsors by winning the deal mandate then bringing in the funded sponsor to get the deal closed. Other times, they’ll get funding from wealthy family offices, bring in SBIC mezzanine funds, or pass the hat to family and friends.

Why are independent sponsors winning deals?
Some independent sponsors are targeted industry experts, making them credible with sellers. Some are adept at highlighting who key future investors will likely be, helping them gain that credibility. And frankly, some independent sponsors are just arguably better, more active, focused salespeople.

In short, independent sponsors have truly increased the number of buyers in the room for lower middle market transactions.

If you have any doubts about the impact of independent sponsors, check out the meteoric rise of the McGuireWoods Conference which is held yearly in October. The Dallas-based conference now brings together more than 1,000 independent sponsors from across the country.

About the Author
Joseph Gaffigan is the president of O2 Sponsor Finance and the former president and co-founder of TCF Capital Funding from 2012 to 2021 until TCF Bank was acquired by Huntington National Bank in June 2021. Mr. Gaffigan remained with Huntington as the president of its sponsor finance unit spinning out in January 2022 to join Old Second Bancorp to form O2 Sponsor Finance. Old Second Bancorp has $5.9 billion in assets and is headquartered near Chicago in Aurora, Illinois.

Chicago-headquartered O2 Sponsor Finance is a national provider of cash flow-based loans to lower middle market businesses with $10 million to $100 million in revenue and $2 million to $10 million in EBITDA. Typical investment sizes range from $5 million to $25 million with syndication capabilities up to $60 million. The firm focuses on supporting private equity sponsors, independent sponsors, and family offices in their acquisition or recapitalization of lower middle market companies.

© 2023 Private Equity Professional | June 9, 2023

Five Risk Management Techniques to Help PE Firms Navigate the Financial Markets Storm

by

Increased volatility in financial markets as a result of higher interest rates has revealed fault lines in banks and lenders, sparking concerns about liquidity among a wide range of investors, including private equity fund managers. The unpredictability of financial markets should serve as another reminder for financial sponsors to anticipate new perils and actively manage a broad array of risks.

Looking for potential exposures and addressing them ought to be an ongoing effort, but this exercise has spurred a greater sense of immediacy in the wake of recent U.S. bank failures and stress within European financial institutions. Without previous dedicated diversification strategies, many institutions were caught flat-footed and experienced huge challenges in managing cash flow and analyzing information from disparate sources. Makeshift treasury management systems based on multiple spreadsheets and scattered reporting proved to be inadequate and left many scrambling.

The challenges facing private equity firms in undertaking
risk assessments and managing transparency are far and wide.

Riding out a storm in financial markets involves not only diversifying funding sources and avoiding concentration risk with key liquidity providers, but also implementing the systems and processes that empower firms to manage cash flow, risk and diversification.

The heightened need to employ robust risk management practices as part of overall liquidity management takes on greater meaning for private equity funds. These investors face market conditions which no longer assure portfolio investments can be easily monetized and fundraising efforts continue to be difficult. It’s an environment in which fund CFOs are increasingly focused on liquidity and modern treasury management systems as part of their efforts to be nimble in a rapidly changing global economy.

The challenges facing private equity firms in undertaking risk assessments and managing transparency are far and wide. Many firms may have become accustomed to relying on one bank because working with multiple institutions requires more advanced tools and processes especially when it comes to managing funds in various markets and across multiple legal entities and currencies. Gathering information from multiple banking counterparties that can be readily scrutinized is also challenging, and most home-grown solutions aren’t suited to manage this level of complexity.

A financial wellness check to ensure that liquidity remains intact and available includes the ability to conduct a broad review of a private equity firm’s counterparties, ensuring that a fund is not overly exposed to a single bank, asset class or industry. It’s an effort that involves ongoing monitoring of financial markets for any signs of stress among counterparties and employing sophisticated tools to track ratings and exposure status in real time.

Five Risk Management Strategies
Private equity firms will want to consider the following risk management strategies as they look to anticipate, and mitigate, a range of risks that have surfaced in what promises to be a protracted period of elevated interest rates:

1 – Diversify Liquidity Sources
While many private equity firms have traditionally come to rely on one financial institution because having a single banking relationship has been simpler, market participants need to be aware of concentration risk within their banking relationships.

In the first quarter of this year, investors were reminded of the pitfalls of relying on a single bank or banking group for liquidity. Funds with too much concentration in one source could face significant liquidity shortfalls when a bank, or group of lenders, encounter financial difficulties and need regulatory intervention.

Financial institutions likely will continue to be tested by the sharp runup in interest rates so diversifying the pool of lenders or banks that serve as counterparties is a key risk management technique private equity funds will want to incorporate.

2 – Mitigate Exposure to a Single Asset Class or Sector
Managing risk through diversification also applies to markets and asset classes because the rapid jump in global borrowing costs has had a powerful impact on a wide range of investments. Fund managers should track exposure to avoid concentration risk in a particular asset class, sector, and geography.

Commercial real estate, for example, illustrates the dangers of having too much concentration in one asset class during a rising rate environment. Real estate funds have been hobbled by diminished liquidity tied to higher borrowing costs that have slowed property sales and have weighed on asset prices. Today, property owners have a tougher time financing commercial property loans because of the Federal Reserve’s rate increases and wider yield premiums, or spreads, on bonds pooling commercial real estate loans.

The challenges faced by participants in commercial real estate serve as an example of why it’s important for investors to diminish their exposure to a single asset class and broaden their portfolio’s risk concentration.

3 – Watch for Telltale Signs of Increased Risk Among Counterparties
Managing counterparty risk involves closely monitoring how counterparties are viewed by financial market participants. This means watching how securities issued by various participants trade in debt markets and keeping an eye on rating actions announced by credit rating agencies including Moody’s Investors Service, Fitch Ratings, and Standard & Poor Global Ratings.

Rating actions can reveal issues about the financial health of a counterparty that pose liquidity risks. And changes to yield premiums paid for a business’ debt signal how capital markets view a counterparty’s risk profile and how readily the counterparty can access funding.

4 – Consider Money Market Funds as a Safe Haven
For private equity fund managers who want a real-time view of cash holdings and a safe haven during volatile market conditions, sweeping excess cash directly into a money market fund or money market account is another risk management technique.

Ideally, any excess cash balances are automatically transferred into a money market fund or account, which provides an additional layer of diversification and liquidity.

Money market funds invest in short-term, low-risk securities such as government bonds and commercial paper. This is a relatively safe option for cash management that mitigates the risk of having too much cash sitting idle in a bank account and provides easy access to funds when needed.

Also, companies can potentially earn a higher rate of return on excess cash with a money market fund or account than they would in a traditional bank account.

5 – Manage Currency and Rate Risks with Financial Tools
The global effort to stamp out inflation with aggressive rate hikes by central banks has fueled volatility in foreign exchange and debt markets. Private equity firms can manage these sharp moves in financial markets with hedges in currencies and interest rates. This hedging of risk can be achieved through various techniques such as forward contracts, options, and interest rate swaps.

Hedging currency and interest rate risk helps private equity firms protect their portfolios from adverse market movements, mitigating the impact of sharp currency and interest rate fluctuations on their portfolio holdings. However, it’s important to note that hedging comes with costs and may limit potential gains. It is also crucial to strike a balance between risk management and investment returns.

Conclusion
Recent stress in the banking system has created fissures in global financial markets and broadened the scope of risks for private equity funds to consider and manage. A financial wellness check, for some, may be a new mindset that will require a multi-pronged approach to anticipate risk, bolster liquidity, and manage exposure to counterparties, assets, and markets.

The latest waves of volatility and concerns about liquidity likely won’t go away soon so it’s not too late to start reviewing counterparty risk and developing relationships with a wider pool of funding sources.

About the Author
Sol Zlotchenko is chief product officer and strategy lead for the private markets group at Hazeltree, a leader in active treasury and intelligent operations technology for the alternative asset industry.

Hazeltree’s treasury and portfolio finance technology solutions serve hedge funds, asset managers, private equity funds, private debt, real estate funds, infrastructure funds, pensions and endowments, and their service providers. Hazeltree is headquartered in New York City, with offices in London and Hong Kong.

© 2023 Private Equity Professional | May 9, 2023

PE’s Traverse into Supply Chain Technology Not Without Some Pitfalls

by

[Source: Getty Images]
Few, if any, observers have a better view into the impact of the supply chain crisis than private equity general partners. They see the wide-ranging impact across their entire portfolio of companies, across different sectors and end markets, and from different perspectives across the value chain. Many, for instance, may own manufacturers who are today being forced to figure out inadequate workarounds to solve for repeated raw material shortages, whereas other portfolio companies in retail may be confounded by inventory, logistics, and distribution gaps quickly becoming a governor on growth. But GPs are nothing if not opportunistic and, in every challenge, lies the next great investment thesis.

The supply chain crisis, in particular, has attracted an increasing number of sponsors now targeting companies able to solve these issues. And many are finding that the supply chain “niche” is far more expansive than some might assume, particularly among vendors equipped to help operators better manage the risk and complexity that characterizes procurement, inventory management, warehousing and transportation. Not surprisingly, investors are gravitating to tech and software segments within the broader supply chain space.

This is, in part, because investors recognize that cutting-edge technology will simply become table stakes to run and optimize increasingly complex supply chains in the future. Moreover, automation is no longer a choice – not when labor shortages and turnover represent equally acute risks in which no other workaround exists other than robotics and automation.

From an investment perspective, the stars have seemingly aligned for the supply chain segment, particularly those offering software or tech-enabled solutions.

Beyond the obvious demand for supply chain solutions, other longer-term tailwinds trace back to secular trends, not the least of which include the growth of omnichannel retail and direct-to-consumer strategies of manufacturers. These trends alone should fuel growth over the medium- and long-term time horizons. At the same time, policymakers increasingly recognize the country’s manufacturing base and supply chain as critical infrastructure that should fuel investment in new technologies for the foreseeable future. (The $52 billion CHIPS and Science Act puts a number on the extent to which Washington is prioritizing these areas today.)

From an investment perspective, the stars have seemingly aligned for the supply chain segment, particularly those offering software or tech-enabled solutions. The caveat, however, is that while digital transformation represents its own compelling catalyst in the segment, it’s also altering what “specialization” should look like in the sector. And past experience investing in more traditional supply chain companies may no longer be applicable to capitalize on the opportunity.

Strategic Activity Beckons PE Interest
To be sure, deal flow and investment activity in supply chain technology is as vibrant as it has been. Strategic activity – particularly from new faces in the supply chain space – speaks to the appetite among larger multinational companies keen to turn the challenges into a competitive advantage.

In retail, Walmart acquired peer-to-peer last-mile delivery platform JoyRun; American Eagle acquired shipper-aggregation startup AirTerra and “in-market” fulfillment-center operator Quiet Logistics; And, most recently, Amazon bought Belgium-based Cloostermans, a designer and manufacturer of mechatronics solutions used to move and stack heavy pallets and totes.

The biggest challenge across the supply chain – one that cuts across all companies and nearly every niche – is the need to drive productivity. 

This activity among strategics, of course, is not overlooked by private equity investors, who view the strategic demand as the final piece of a seemingly airtight investment thesis. Last year, according to PitchBook Data, financial sponsors secured 53 new investments valued at $20 billion. This surpassed the value of all deal flow over the previous three years in the supply chain tech vertical. Exit activity also surged as GPs secured 21 total realizations of supply chain technology investments worth a combined $13.5 billion.

Why Tech? Reduce Risk, Replace Resources
Again, the supply chain segment at large is quite vast and there is no shortage of opportunities outside of tech for sponsors to step in and address the gaps. KKR, for instance, acquired Hitachi Transport, the third-party logistics business of Hitachi, earlier this year for over $5 billion, while Sun Capital is pursuing a rollup of intermodal drayage and warehousing companies through its Total Transportation Services platform. (Drayage, for the uninitiated, refers to the transportation of freight from an ocean port and is colloquially referred to as “first-mile” transportation.)

[Source: Getty Images]
But the biggest challenge across the supply chain – one that cuts across all companies and nearly every niche – is the need to drive productivity. Simply put, operators, to compete or grow, must move goods and products more quickly and efficiently from manufacturer to end consumer and be agile enough to accommodate raw material shortages or labor disruptions as they occur. The labor crisis, for instance, has created a ripple effect in which warehousing and transportation have been among the most affected areas, cutting into on-time delivery rates, fueling higher input costs, and exacerbating supply shortages.

Technology that can either manage these risks or eliminate the “people” problem altogether should emerge as winners. Unfortunately, it’s not as simple as buying companies that claim to solve these challenges.

Software to Manage the Risks…
One of the challenges of investing in software is the paradox of choice that characterizes the solutions available to both operators looking to utilize technologies and GPs investing in them. “Control tower” software, for instance, can provide end-to-end visibility to track deliveries in real-time; forecasting tools, similarly, can help inform planning and budgets over short- or longer-term time horizons; while inventory management tools help companies track purchase orders, fulfillment, sales, and product levels.

Yet one glaring hang-up remains, especially given the objective of automation, which is that even the most advanced robotics very often require human intervention.

However, the solutions that stand out in today’s environment, are tools that allow operators to better manage their risk. Advances leveraging the cloud, AI and machine learning, as well as IoT capabilities, can provide insights and signals that wouldn’t otherwise be available. They can connect disparate segments across the supply chain, factoring in supplier locations, port data, geopolitical developments, and an almost limitless number of other inputs. These tools can give operators a view into the future to predict where disruptions are most likely to occur as well as the knock-on effects they can have on the business.

Robotics to Solve Them
In one sense, few areas across the economy have adopted automation and robotics more enthusiastically or effectively than certain areas across the supply chain. Yet, the technologies being deployed are quite dated in many cases, to the point that they’re relatively immature today. This point is underscored by the extent to which new advances in robotics have leapfrogged the industrial belt conveyors and automated sorting systems are still quite common in most warehouses and fulfillment centers today.

Yet one glaring hang-up remains, especially given the objective of automation, which is that even the most advanced robotics very often require human intervention. Even Amazon, a first mover and innovator, largely relies on “co-botic” solutions to ease manual roles rather than replace them outright.

Since Amazon acquired the maker of Kiva warehouse robots in 2012, the company has rolled out autonomous mobile robots to help move heavy objects; robotic workcells using advanced AI to lift and sort packages; and even ergonomically designed containerized storage systems that help fulfillment-center employees find and retrieve specific products.

Amazon Robotics develops software and manufactures machinery to automate the flow of inventory in Amazon fulfillment centers. [Source: Amazon]
The killer app in supply chain robotics, however, will be automation that replaces – instead of just assisting – labor. Enhanced productivity and sustainable efficiencies are just as critical, but technology that eliminates the threat of workforce shortages will help solve for a trend that poses an increasing risk for the foreseeable future.

Avoiding the ‘Thesis’ Trap
Private equity investors are quite familiar with a value trap – or assets that appear cheap but also carry significant, unseen risks that stand in the way of multiple expansion. The supply chain technology segment, however, represents something of a “thesis trap.”

Several secular trends, for instance, have conspired to create a truly compelling window for investors active in the space, characterized by a deep, pressing need in the market; powerful tailwinds in the form of government support and shifting consumer shopping behaviors; as well as accelerated transformation driven by advances in AI and cloud technologies, as well as robotics and additive manufacturing.

Ironically, this last point that underpins most investment theses also creates some pitfalls for investors. GPs may have an extensive track record across the industrials, transportation and supply chain verticals, but if they’re less familiar with technology and software investments, they may be ill-equipped to capitalize on the opportunity.

As the tech giants focus on building out their own suite of supply chain software, smaller vendors have to worry about falling on the wrong side of the “Beta vs. VHS” conundrum.

To be sure, supply chain technology investments require an entirely different playbook. This is true, not only to underwrite investments premised around growth versus asset values but also to effect value creation and realize the growth assumptions that informed an entry multiple. Other differences also emerge.

For instance, buy-and-build strategies, which can be effective, also demand a deep technical skillset to create a seamless suite of capabilities that are each compatible with the other and can be integrated into larger product lifecycle management (PLM) platforms. Moreover, with so many variables across the supply chain, system implementations can take longer than most might anticipate. If the solution doesn’t meet identifiable service level agreements (SLAs), investors will quickly discover recurring revenues aren’t always as predictable as promised.

Another go-to initiative – particularly in private equity’s middle market – is to build out a sales and marketing function. But this relatively simple initiative can be more nuanced and even less reliable for SaaS solutions that have a longer sales cycle, often require strategic trial periods, and rely on sophisticated up- and cross-selling strategies to boost annual recurring revenues (ARRs). Manpower, alone, is inadequate.

Finally, investors in nearly every sector are aware of the Amazon threat. In the supply chain technology segment, investors also must worry about Microsoft, SAP, Oracle and several other dominant incumbents. On one hand, these giants may represent a prospective buyer of any new technology. On the other hand, as the tech giants focus on building out their own suite of supply chain software, smaller vendors have to worry about falling on the wrong side of the “Beta vs. VHS” conundrum. (They may have a better competitive alternative, but without critical mass, their solutions will fail to gain any traction). And across such a global, interconnected landscape, this risk may be even more pronounced than in other sectors.

None of this is to say that the opportunity set is any less appealing. And outside of the software and robotics verticals, there are plenty of attractive niches across the supply chain that represent a compelling fit for specialists in the industrial manufacturing and transportation sectors. Supply chain technology, however, will require a more unique skill set.

That being said, the segment is ripe for investors well versed on the pain points and complexity across the supply chain and equally adept at digital transformation and growing great technology companies able to compete with the world’s largest vendors. It’s a perfect storm that can deliver outsized rewards, but it will require flawless execution to capitalize on the opportunity.

About the Author
Ken Koenemann joined North Carolina-headquartered TBM Consulting Group, an operations and supply chain consulting firm, in 2006. TBM’s clients include manufacturers, distributors, service companies, private equity firms and their portfolio companies. TBM specializes in operational excellence, supply chain management, human capital strategy, private equity value creation, digital manufacturing, and management system implementation.

Mr. Koenemann is widely recognized for his expertise in translating lean principles to supply chain and customer-facing processes in manufacturing and service organizations. Over the past three years, he has become responsible for growing the supply chain practice and driving TBM’s technology strategy, creating value-added technologies and services for client business operations. During his career, he has consulted with leading companies including Pella Corporation, Owens Corning, Dell, WIKA Instruments, Carlisle Companies, and Trinity Industries.

Mr. Koenemann is based in Las Vegas, Nevada, and can be contacted at [email protected].

Waters Shark-Infested, Swimming Fine

by

Source: Getty Images

By Andy Greenberg
Greenberg Variations Capital and GF Data

Every conversation among deal professionals these days seems to come round to the contrast between a highly functional transaction environment and a global scene beset by chaos and uncertainty. Is it just a matter of time before so much ballast — inflation, interest rate increases, labor shortages, supply chain disruptions, war abroad, social division at home – pulls the buoyant M&A market to earth? The successful business owners we advise at Greenberg Variations Capital certainly have this question. Here is my response:

A Slowing Market
After a torrid 2021, the M&A market is already slowing – not because of the effect of all those issues on capital markets, but because of their effect on businesses considering exit. It is a rare company not grappling with one or more of those macro pressures. GF Data, the private equity data service I co-founded, recorded virtually no drop off in completed deal volume among contributing private equity firms from Q4 2020 to Q1 2021. Our Q1 2022 report, to be released in a few weeks, will show a decline from Q4 2021 of more than half.

Supply Chain Noise
Good businesses able to see through the noise of supply chain issues and other disruptions are receiving more attention than ever.

Completed deal data is being distorted by the number of less-favored businesses choosing not to transact. Looking once again to GF Data for perspective, we track a “quality premium” – the spread in valuation between selling firms with above-average financial characteristics and other businesses. In 2022, the spread continued to creep upward – to about 1.8x EBITDA – but the incidence of above-average performers was even more notable. It is almost always 56% to 57%. We don’t manage to that – it just works out that way.

In 2022, above-average performers accounted for 66% of completed deals. If more out-of-favor companies took the bitter pill of selling at prevailing pricing, that percentage would have been closer to past experience, total deal volume would have been up, and overall multiples would have declined. However, multiples of double digits or more for larger and/or more desirable businesses would be undiminished.

A Dynamic Market
Throughout the sustained seller’s market of the past decade, the deal ecosystem has not remained static. There have been meaningful shifts that have had the effect of “de-risking” transactions and enabling capital flows and deal activity to continue. In the pandemic and its aftermath, we’ve seen the acceleration of several inter-related mechanisms to help recalibrate risk:

Offloading of business-specific risk. Over the last half dozen years, rep and warranty insurance has come to permeate the private transactions market. In 2021, 56% of private equity buyers reported using an insurance product. In the $100 million to $250 million deal value range, it was nearly 75%. With that much more underwriting – and consequent loss experience – we have learned that the most frequent areas for insurance claims – misrepresentation of financial statements, inventory and other cost accounting issues – are specific, but not necessarily unique.

The insurance carriers are reaching deeper into deal documentation process to address the risks that have a certain commonality from deal to deal. This gives buyer and seller more bandwidth to grapple over less routine exposures.

Greater emphasis on industry-specific risk. I was talking the other week with a friend who has operated for 40 years in the flavors and fragrances industry. For most of that time, raw materials costs were not subject to surges. Delivery issues were rare. Global trade policies were stable. Now, a flavors formulator needs to understand a much more complex range of issues relating to the global supply chain.

Buyers in general are requiring a more highly detailed understanding of these issues. Market studies and similar due diligence has not been as prevalent in the United States as in Europe. That has changed, rapidly. This requirement also has steepened the tilt toward deep industry expertise on the part of buyers.

It is not new that an industry-focused acquirer is able to share relationships, tradecraft and jargon with a would-be seller. But now, let’s say the current year forecast requires a view on whether a principal supplier will remain available, or is likely to impose price increases mid-year. The buyer with a current portfolio holding or deep sectoral experience can more quickly come to a more authoritative assessment.

Lower targeted returns. How do buyers continue to pay ten times EBITDA or more for desirable platforms? Planning on lower-priced add-ons to “average down” has become a favored strategy. But as expected returns on public equities have declined, private equity and debt instruments have followed suit. Mezzanine financing, which for years gravitated to a “12 and 2” template in the middle market has pushed down to all-in pricing averaging in the 11 to 12 percent range. Target equity returns in many cases have similarly dropped from high to mid-teens. These compressed returns are instrumental in holding valuations aloft.

THE TAKEAWAY:  Greater unpredictability imposed by the world at large means more moments when it will not be optimal for any given business owner to choose to sell. But the prevailing dynamic for years has been “demand push” rather than “supply pull.”  That is, the owners of a successful private company tend to sell when the time is right in their lives and the life of the business, as opposed to being drawn in by favorable or unfavorable market conditions. For all of the accumulated potential hazards occupying our minds these days, I do not see that dynamic changing.

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. He is also Founder of GF Data© (now an ACG Company) the leading provider of information on private transactions in the $10 to $500 million value range. For more information, visit www.greenbergvariations.com or www.gfdata.com. 

© 2022 Private Equity Professional | May 5, 2022

Mid-Market Capstone Joins Huntington

by

Publicly traded Huntington Bancshares has agreed to acquire middle-market investment bank Capstone Partners.

Capstone’s investment banking services include mergers and acquisitions, capital advisory, financial advisory, special situations and restructuring. Capstone has more than 175 employees and is headquartered in Boston with additional offices in twelve cities including Denver, Chicago, Dallas, Detroit, Los Angeles, New York and Philadelphia.

“Twenty years ago, we founded Capstone with the goal of building a middle-market leader. Since then, we have been an innovative, growth-oriented firm, and we are excited about our future with Huntington,” said John Ferrara, Capstone’s founder and CEO. “Our combined capabilities will enhance Capstone’s full suite of products and services to private business owners and financial sponsors. We believe this combination puts us in a strong position to pursue continued market acceleration and deliver a superior experience for our clients, employees, and partners.”

Huntington Bancshares (NASDAQ: HBAN), with $174 billion in assets, provides banking services to consumers, small and middle-market businesses, corporations, and municipalities. The Columbus, Ohio-headquartered bank was founded in 1866 and has more than 1,000 branches in 12 states.

“The addition of investment banking and financial advisory services aligns with our capital markets strategic plan and better positions Huntington to serve the full range of needs of middle-market clients within our footprint, as well as those we serve on an increasingly national basis,” said Scott Kleinman, co-president of Huntington Commercial Banking. “The combination of Huntington’s brand and capabilities alongside a premier middle-market investment banking franchise with unique industry insights creates a differentiating experience for our clients.”

Huntington’s acquisition of Capstone is expected to close in the second quarter of 2022.

Keefe, Bruyette & Woods, a subsidiary of Stifel Financial, is the financial advisor to Capstone on this transaction.

© 2022 Private Equity Professional | March 8, 2022