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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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Private equity having a bang-up year: recap of the Western M&A/Private Equity Forum

Optimism wasn’t on the official agenda of the Daily Journal’s recent Western M&A/Private Equity Forum, but it was definitely a common theme throughout the event. Major legal players in the PE industry gathered at the Le Meridien in San Francisco, and it was clear these dealmakers are having a historically strong moment.

I had the privilege of attending the forum and soaked in the positive energy—the group as a whole is extremely optimistic. While 2015 saw $360 billion in deals, this year will most likely surpass that figure and put total deals in the $400 billion range.

This significant volume has been brewing for some time. At RoseRyan, which has many clients engaged with private equity, we have seen PE firms extend their traditional interest in mostly midsize companies to invest in smaller businesses as well as increase their activity in larger corporations. Perhaps there has never been so much firepower on the sidelines due to low interest rates and minimal places to invest.

Although the attendees and panels were optimistic, they did put things in perspective as the shadow of the dotcom and 2008 financial crises does persist. The upside right now is that we’re in an unprecedented time of growth as the following characteristics hold true:

  • Companies have better business models
  • Companies have more cash
  • Valuations are more realistic versus last year
  • Sellers are more pragmatic
  • Sellers and buyers are being more creative to get deals done
  • Companies are willing to spin out divisions

Where is the activity happening? The tech industry is particularly hot right now, of course, particularly considering the trends noted by the forum’s participants. These include:

  • 2015 seemed to be the year of semiconductor companies, while for 2016 the key areas of investment are big data, analytics, mobile, artificial Intelligence, and deep learning.
  • Chinese investors are aggressively looking to expand IP and want to place money outside of their own country. They want more innovation indigenous to China and are looking at making deep technology deals to make that happen.
  • Internet of Things (IoT) continues to expand. Large industrial companies (GE, Bosch, Intel) are getting more involved in this space, adding to the momentum.
  • Activist investors are packing more power with lower percentages of ownership. PEs are avoiding activist roles and are okay with being quiet and leveraging the activists’ activity.

In this age of uncertainty, when the election outcome is unclear and some businesses are reporting slowdowns, it was great to hear about a highly active market. Most deals are seeing multiple bidders, and participants reported that deal activity likely won’t be affected by elections or the Brexit fallout.

The fact is that companies, particularly in the tech sector, should be proactive as PE firms continue to extend their reach. Savvy companies that are fully prepared for the possibility of PE’s interest will be poised to make the best decisions for their future.

Chris Vane is a director at RoseRyan, where he leads the development of the finance and accounting consulting 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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Going dark: What it means and why it might be a smart move for your company

What happens if your public company decides to “go dark”? If you are in the military or in covert operations of some sort, this slang term means you have ceased all forms of communication—probably to save your life. Teenagers can sometimes go dark. If your teenage son or daughter is not responding to your phone calls, texts, tweets, and any other way you to try to communicate, they’ve gone dark. You may feel snubbed and left out. But consider the positive aspect: This quiet period is actually part of their development. They are establishing their independence. Are they using their time wisely? That is what needs to be determined.

For publicly traded companies, going dark means they are delisting from an exchange (e.g., NASDAQ) and simultaneously deregistering with the Securities and Exchange Commission. In this age of transparency, going dark may not seem like a smart move. In fact, it might be just the right move, depending on the company’s objectives. Returning to the teenager example, you need to know—is your company using its time wisely?

If you are an investor, business partner or employee of a company that is going dark, pay attention to these areas as you explore the future potential of the business.

Take a closer look. While there are several practical considerations in the decision to “go dark,” the company may also have strategic implications. Review company filings with respect to the process, as well as press releases announcing the decision. These documents are intended to provide information as to the considerations involved in making the decision to go dark. Strategic implications may or may not be evident from the press releases and filings. It pays to take a closer look and see if you notice opportunity behind the ominous sounding development (more about this later).

Review current shareholder listings and changes in shareholdings. You can get this information from periodic SEC filings, including the latest proxy statement. This will tell you if there are major shareholders owning the stock. A little more research may give you some insights on the major shareholders and their plans for the company.

As an example, a major investor might have a strong track record in turnaround situations, or industry consolidation strategies or other strategic moves. Chances are, you will see a concentrated shareholder base, as companies that go dark must have fewer than 300 registered shareholders (an SEC rule). It pays to know who is driving the bus.

Also review company liquidity and capital structure. Once a company has gone dark, it no longer has direct access to the public capital markets. As a practical matter, if it is a small or microcap company, or if it is underperforming its peers, the company may not have access to such markets in any case. This is something to consider if the company has liquidity issues or is undercapitalized. Private equity and debt may or may not be available, and it can get expensive.

Consider whether cost avoidance is a legitimate driver. Publicly traded companies spend a lot of time and money maintaining the standards required by the national stock exchanges and the SEC. The costs easily exceed $500,000 per year for even the smallest of the small cap companies, to include annual audits, quarterly reviews, legal fees, audit committee fees, SOX compliance costs, annual registration fees and increased insurance premiums for director and officer liability. Oftentimes, boards find that the incremental costs of the public listing outweigh the benefits. Companies often site cost savings as a significant factor in going dark. Saving precious capital is a legitimate reason, but it has a downside.

Look into shareholder liquidity. Shareholder liquidity is probably the scariest part of the going dark process. When the company delists from national exchanges, its stock may continue to trade, but liquidity will depend on whether brokers will continue to make a market for the shares. There can be no guarantees. As such, shareholders may find it difficult, expensive and/or at least time consuming to sell the shares. And there may be a very thin market or no market at all. However, as long as there are market makers, the alternative exchanges—the pink sheets, the bulletin boards, etc.—will continue to trade the shares.

See if you will still have access to financial information. Transparency is another possible casualty of going dark. Most companies that deregister follow a practice of posting their periodic financial results either through quarterly press releases or direct posts on their websites. While they are under no obligation to do so, it’s good business practice, and it doesn’t cost much. And many companies continue to maintain a website and provide contact information. While you won’t see a Form 10-Q or Form 10-K or any of the other SEC filings, at least you will see quarterly and annual financial information, and hopefully you will have contact information if you have questions.

Study the strategic intentions. As noted above, there may be strategic reasons a company goes dark. It could be a logical step in taking a company private and could be a part of a bigger plan. Going dark is a relatively low cost exercise, with immediate cost benefits. If the strategy is in fact to “go private,” and your research shows that the major shareholders have a good track record, you could stand to benefit. At some point the majority shareholders and/or the company may be back in the market to cash out minority shareholders. Once again, no guarantees, but it’s something to consider.

Anytime a company goes through a transformative event, it’s wise to turn to experts who have gone through similar situations and can step in to guide the company, based on their past experiences, best practices and what makes the most sense for the business. Going dark is not routine—it’s a vital, transformative time that requires specialized expertise.

Terry Gibson heads up RoseRyan Private Equity to help PE firms extract more value from their portfolio companies. A founder of Steel Partners Corporate Services, he has been focused on serving the PE industry for over 15 years. He was the CEO of CoSine Communications and BNS Holdings, and he oversaw the finances at Calient Networks and served as controller at Lam Research.

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Finance’s role in unlocking value for private equity portfolio companies

When private equity firms choose their investments, they see promising potential. The entity that becomes their portfolio company may have hit a roadblock and is in need of a transformation. An entirely new strategy could be in order. Behind that strategy is a strong finance team that plays a pivotal role in helping the PE firm realize the full potential of that new investment.

Over the past 15 years, I have had the opportunity to help PE firms translate strategy into financial decisions for their portfolio companies. It’s a fascinating CFO role, as there are so many unique factors at play with every company—and there is a sense of urgency, a sense of purpose. Every operating plan, every exit strategy is different. All parties (new investors, old investors, the management, the board) have a vested interest in getting the company moving in the right direction. With the right kind of finance guidance, and alignment around a well-thought-out set of objectives, the company can move where it needs to go.

The CFO in this type of scenario—whether it’s outsourced or a full-time position—has responsibilities to investors, the PE firm and the portfolio company, and is entrusted with improving the company’s operating performance, uncovering efficiencies, boosting productivity, executing the game plan and, ultimately, unlocking value.

The following activities are critical:

Setting up a strong governance foundation: Jumping in to lead the finance function at any time requires leadership skills, technical know-how and an action-oriented mindset. There are a lot of moving parts, and it’s important to focus on alignment toward the goal, creating the right set of performance-based metrics and compensation, and setting up the right practical processes to aid in decision-making.

Laying a strong foundation of financial operations: Timely, accurate financials are essential for understanding the state of the business. These are made possible when accounting systems and processes are up-to-date and internal controls are set. A robust finance function will help the company meet its compliance and regulatory requirements, ensuring the private equity firm can stay focused on the overall strategy and feel confident that the company is progressing rapidly. When the pace of business is fast—as it tends to be in the private-equity world—underlying data needs to be accurate for effective decision-making.

Victory lap
Sure, the transactions make the headlines, but what excites me is the transformation of a company to meet the PE firm’s strategic objective. Every journey is different and sometimes the timeline is several years. The wheels put into motion vary considerably based on the situation. If you do it properly, your efforts will be rewarded and your investors and management will have realized significant appreciation, and that’s exciting stuff.

Terry Gibson heads up RoseRyan Private Equity to help PE firms extract more value from their portfolio companies. A founder of Steel Partners Corporate Services, he has been focused on serving the PE industry for over 15 years. He was the CEO of CoSine Communications and BNS Holdings, and he oversaw the finances at Calient Networks and served as controller at Lam Research.

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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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Sales of private shares presenting new challenges; SEC reviewing rules

Last month, SEC chairman Mary Shapiro told the House Oversight Committee that the commission is reviewing the rules and restrictions surrounding the sale of private company stock. Current restrictions include, among others, a limit of 500 shareholders and the prohibition of general solicitation.

The SEC’s increased scrutiny of private company stock sales is the result of the increased visibility of these transactions, as shares of  Facebook, Zynga, Twitter and other highly anticipated IPO candidates are in high demand and are being resold to other individuals or entities. New Internet-based platforms, such as SharesPost and Second Market, that connect buyers and sellers in these private transactions are also upping the ante. (There’s a good look at the issues in the New York Times’ Dealbook blog.)

Companies and boards are responding in different ways to this pressure. Some, for example, are placing additional restrictions on private stock transactions or implementing new governance and internal control policies.

Where this is heading and what actions the SEC might take are up in the air, though the SEC said it’s considering loosening some restrictions, eliminating certain disclosure requirements, restricting communications in IPOs, and other measures. All parties—sellers, buyers and regulators—have their own agendas and responsibilities. But it’s certain that oversight and administration of private company stock sales will be an increasingly common challenge for company management and finance teams.

However it plays out, if you’re a company with privately held shares, you’ll need to consider a number of strategic and administrative issues, including:

  • Exercising the right of first refusal and other considerations such as co-sale rights
  • Control and knowledge of the shareholder base
  • Implications on your 409A valuations and future stock option pricing
  • The need for trading windows around the transactions
  • Implementing an insider trading policy
  • Defining what information will be released to new purchasers
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