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Deal flow in the PE market continues to move—here’s why

What’s hot in the deal world at the moment? The fintech sector continues to generate steam and so is another industry, the wine business. Private equity investors’ interest in turnarounds has diminished somewhat, and they are instead prioritizing growth and control in their investment strategies.

These were just some of the noteworthy learnings and interests expressed by private equity firms during the Association for Corporate Growth’s (ACG) West Coast M&A Conference in San Francisco this spring. As they networked, attendees said they’re seeking deals that typically have 10% of revenue EBITDA or a total of $3 million to $15 million of EBITDA at a minimum. Optimism is high with expectations that we’ll see deals continuing to flow but possibly slow down toward the end of the year.

Here are the highlights of what’s on dealmakers’ minds at the moment—most of the conference attendees represented firms seeking deals in the $5 million to $100 million range. The firms represented at least five states including many from New York, Massachusetts, Arizona, North Carolina, Connecticut and, of course, California.

An active market

Deal flow continues to be strong, and everyone is seeing lots of activity, according to participants of the keynote, who included Dipanjan Deb of Francisco Partners, John Kim HIG of Growth Partners and Dave Welsh of KKR.

The overall belief is that the past two years have been particularly fruitful, and that opportunities will slow down toward the end of the year as a result. The innovators of the fintech market are getting attention, leading to one of the most robust deal areas as the entire banking system is disrupted by these strong niche players.

Success vs. failure

There are some big deals to be had in the PE space. Darren Abrahamson of Bain Capital emphasized that the talent of the management teams is a critical factor in the success or failure of a deal. Everyone during a panel that included Abrahamson, Heather Madland of Huron Capital, Greg Clark of Symantec and Mark Grimse of Rambus hit on this theme: No matter how big the transaction—the outcome ultimately comes down to management’s ability to execute pre and post deal.

Moreover, they went over what derails some deals—inadequate systems and processes can take much of the blame. The panelists emphasized that successful companies need a strong understanding of their core competency (high value add) versus other strengths of their business.

A different varietal of M&A

The wine industry has had a tremendous number of deals over the past year, and owners believe it’s hitting a peak. This industry is extremely “high touch” and relationship driven due to the family nature of ownership, noted panelists who focused on this topic, including Adam Beak of Bank of the West, Pat Roney of Vintage Wine Estates and Richard Mendelson of Premium Wine Properties.

The business model of three-tier distribution comes into play as well as cash flows that can be varied across different properties. Money is not the only thing that is driving high valuations—brand and locations are key factors as well.

The road ahead

This M&A Conference had a positive tone. Deal flow this year is very strong due to the low cost of capital and the overall optimism in the economy. Overall the PE market continues to chug forward as the cost of money and quality of deals are favorable. There are some niches doing particularly well (fintech) and few areas are struggling. Valuations seem to be both beneficial to both the PE firms and companies.

Chris Vane is a director at RoseRyan, where he leads business development for this finance and accounting consulting firm’s high tech and cleantech practices. He helps fast-moving companies calm the chaos with precision finance at any stage. He can be reached at [email protected], or call him at 510.456.3056 x169.

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Sports and digital technology: When industries collide and amazing things happen

Tech companies are in the business of transformation. They have the ability to transform something we do every day (like how we communicate) and transform entire businesses (back to the business-model drawing board for some folks). This is why it was fascinating to hear about the major impact that digital technology has had on the professional sports industry during a recent ACG (Association for Corporate Growth) meeting in San Francisco.

How technology has intersected with sports was the main topic of discussion by speaker Roger Noll, professor of economics, emeritus at Stanford University, who is an expert in the study of sports marketing and the economic expansion that has transformed professional sports in the past 20 years.

Here are a few statistics he shared that help illustrate how dramatic this industry has changed:

  • The average professional hockey team from 1965-1975 was family owned and had less revenue than a typical Chevron station.
  • The Yankees and the Dodgers were sold around 1970 for $12 million each, the first teams to be valued at over $10 million.
  • Bill Russell was the highest paid NBA player in the late ’60s. He made $12,000 a year.

The introduction of digital technology and the enormous expansion of the TV viewing audience have fundamentally transformed the reach and capabilities of pro sports teams, enabling them to enter more households and sell more merchandise. And increase their fan base at every turn. The downside: supply and demand. You still have the situation of a fixed number of teams and 10x the number of TV stations that want to broadcast games. Also, more cities want to host professional teams than there are in existence (something 49ers fans in San Francisco know all too well).

Sports team owners have taken smart advantage of demand. They realized they don’t need to build larger stadiums for additional seating—they can keep their stadiums around the 45,000-seat average—and use a lot of their space for concessions, shopping and arcades. Merchandising and broadcast revenue is where the big money is, and now teams are worth between $1 billion to $2 billion!

Of course, other factors have led to the dramatic increase in revenue, salaries and valuations, such as collective bargaining with the players and shared revenue contracts, but the key enabler was the growth of digital technology and digital media. Advances in technology have expanded how much time we all spent consuming and thinking about sports—and how many of our dollars we give toward it. People today spend much more of their free time watching sports, reading about them or shopping for merchandise.

One of the most challenging and thought-provoking books I’ve ever read sprang to mind when I was at the ACG meeting. Published in 1967, The Medium Is the Massage, by Marshall McLuhan, was packed with ideas that were decades ahead of their time. With his concept of an electronic Global Village and the mass influence of electronic communication technologies, McLuhan predicted the Web and social media over 30 years before they came into existence.

Now when we’re on the move, we can make sure we don’t miss a minute by teeing up the DVR through our smartphone. We can get the sense of camaraderie even if we’re watching alone in our living rooms by sending out real-time reactions on social media. On top of this, we’re living in a time where we can skip the stadium but feel like we’re still at the game through a virtual reality headset.

The transformative changes and the power and influence that technology has had on professional sports remind me of this quote in McLuhan’s book: “We become what we behold. We shape our tools and thereafter our tools shape us.”

What tool is going to shape your business in the year to come? What disruptive innovations, products and trends are wending their way into how your products or services are perceived, consumed and monetized? Some of the leading candidates—the internet of things, artificial intelligence, driverless vehicles and nanotechnology, to name a few—are poised for some transformative effects (not to mention they’ll be multitrillion-dollar markets within 10-20 years). How will these changes affect your lifestyle and your business?

Stay curious, my friends.

Stan Fels is a director at RoseRyan, who joined the finance and accounting consulting firm in 2006. In addition to helping the finance dream team keep their skills sharp and stay true to RoseRyan’s proven processes, he matches gurus to clients in the high tech and life sciences sectors. 

 

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Lucky for now: Dealmakers are optimistic about the near future

It’s fitting the annual Association for Corporate Growth (ACG) West Coast M&A Conference was held on St. Patrick’s Day. We were all feeling a bit lucky with a nice bounce-back in the markets, and a cautious sense of optimism was shared by many of the upwards of 300 attendees, consisting of specialists in private equity, banking, and finance and accounting, as well as entrepreneurs.

A faint wariness has been in the air since November, when the economy had a clear drop in financings and valuations. Conference attendees in general believe the dip was due to overheated valuations that had continued to rise despite concerns over whether imprudent investments were getting made.

With the state of the markets setting the stage for the event, there were many takeaways to be had at this San Francisco conference, which I attended with my counterparts at RoseRyan, Terry Gibson, who oversees the RoseRyan Private Equity service, and director Stan Fels, who was there for the small-business perspective. Here are the topics everyone was talking about:

  • In one session, approximately 30% of the attendees predicted that there would be a recession starting some time in the next year and a half. It was tempered with thoughts that it wouldn’t be nearly as bad as the 2007/2008 recession.
  • There was a strong shared sentiment at the conference that the business cycle has gone to the wayside as Fed policy is now the biggest indicator of whether the economy will expand or contract.
  • A common topic of discussion was the democratization of fundraising. This is taking form through the increased use of technology to bring buyers and sellers together in an efficient way. Tremendous growth in the enabling technologies has made this all possible (consider these now-common names we didn’t know a decade ago: Kickstarter, Indiegogo, Lending Club, GoFundMe, Lending Club, Prosper and Funding Circle).
  • The personal touch is not leaving. Investors still want to understand the business owners who are seeking money. The old rule of being close to your money still resides. This was emphasized from the private equity folks in the room to the entrepreneurs as well.
  • Bankers are starting to get risk averse—no surprise there.
  • There is lots of money in the PE marketplace. Due to the dearth of opportunities and low interest rates, opportunities are still out there. Valuations are coming down dramatically. Fidelity, in particular, has been aggressive in downgrading its investments.
  • Fintech is exploding, enabled by the rise in big data and analytics. Machine learning and artificial intelligence have helped companies in this field better gauge risk and tap into markets where bankers are afraid to risk capital. Attendees and speakers expressed great optimism about this sector and marveled that it’s a phenomenon that’s been going on for at least five years now.

Deal-making has its up and down times, but there are opportunities in the M&A space at the moment. Capital is definitely available. It is a safe bet that there will be more prudent investing, more cautionary growth plans and more options on how to raise money in the coming year.

And there will certainly be new ideas brought to the table by entrepreneurs looking to transform our lives. The last session I attended was an entrepreneurial meetup in the style of the TV show Shark Tank. I watched as Amy Errett, CEO of startup Madison Reed, flawlessly executed her pitch for a prepackaged hair coloring kit billed as “makeup for hair.” Using a combination of technology and healthier formulas, the startup is attempting to be a disruptor in the hair-coloring space.

As the father of three daughters, I took notice when Amy mentioned the hair coloring market is a $50 billion industry. I introduced myself to Amy after her presentation and took the free $75 gift certificate and headed out the door, feeling cautiously optimistic about the prospects ahead.

Chris Vane is a director at RoseRyan, where he leads the development of the finance and accounting firm’s cleantech and high tech practices. He can be reached at [email protected] or call him at 510.456.3056 x169.

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