On December 4, 2012, the Philadelphia office of Drinker Biddle & Reath LLP hosted its 6th annual roundtable discussion entitled “The State of the Debt Markets in Private Equity Transactions – Investing in Your Future.” At the roundtable, representatives of private equity sponsors, senior lenders, mezzanine lenders and investment bankers participated in a discussion with Drinker Biddle’s private equity and corporate finance lawyers.
Michael Aswad, Director of Private Investments for the Robert Wood Johnson Foundation gave introductory remarks, sharing the perspective of a large philanthropic foundation when considering private equity investments. Established in 1972, the Robert Wood Johnson Foundation provides funding to promote the health and health care of all Americans. Mr. Aswad discussed challenges in the current economic environment, looking back at the past year and forward to the coming year, and touching on the implications of market trends for private equity transactions. Among other things, Mr. Aswad noted that EBITDA multiples appear to be returning to pre-financial crisis levels supported in part by accommodating bank debt and capital markets that are permitting more highly leveraged capital structures, resulting in a seller-friendly marketplace for larger, higher quality companies.
After the introductory remarks, there was a discussion among the participants. The discussion focused on both the current climate for transactions and expectations for the future. Following are some highlights of the discussion:
- The conversation began with a discussion of deal flow in 2012. Many participants found 2012 to have been a busy year, but not as busy as had been anticipated. Participants described the high levels of capital available for transactions, from private equity funds to corporate balance sheets to debt providers. Sellers are also looking to sell, having in some cases regained their losses from the downturn. It was further suggested that this will continue and increase as baby boomers age and exit their businesses.
- While some participants indicated that they have seen consistent deal flow in the middle market, other participants responded that they have seen decreased volume at the higher end of the market and a general slow-down in the second half of 2012. The consensus was that this may be a result of hesitance and fear of the unknown in light of the downturn in the U.S., the state of affairs in Europe, and the looming “fiscal cliff,” and that this remains a challenging market. It was also suggested that some potential sellers are reluctant to initiate a sale process due to concerns that their financial performance may not be as strong as they project due to overall economic conditions and that even a single weak quarter could derail a sale process.
- Private equity funds are seeing a strong market on the sell-side and a challenging market on the buy-side, with high auction prices. Some private equity funds have undertaken successful add-on acquisitions and multiple acquisitions with the aim of combining targets post-acquisition. There is also an increased focus at some private equity funds on market niches and innovative technologies.
- The discussion turned to whether participants are seeing an increase or decrease in deals arising through full auctions as compared to bilateral or quiet auction sales. Private equity participants discussed their inclination to approach likely buyers early in the process for informal discussions and a preference on the buy-side for sales outside a full auction process.
- As the conversation turned to “staple” financings, participants observed that buyers are showing decreased interest in these processes as capital is readily available. At least one of the financial institution participants commented that financial institutions are hesitant to invest in a prolonged, competitive process with multiple rounds of bidding.
- The group discussed what it has been seeing as far as “turn-key” management transactions and continuity of management. A question was raised about existing management taking greater control of a sale process and what that might mean for both buy-side and sell-side sponsors. There was general agreement that the focus should be on developing and maintaining good relationships with management, in some cases working together with them. While participants indicated that these proposals are becoming more common, there appears to remain a preference towards private equity teams installing a new management team.
We will continue to monitor trends and developments in this area. For more information on the matters discussed in this Alert, please contact one of the Corporate & Securities lawyers listed above, or your regular contact at Drinker Biddle.