M&A Activity in a Pandemic-affected Economy
private equity investment
Leading up to early March 2020, the M&A markets were enjoying a long and sustained track record of unprecedented success. Both M&A transactions and dollar volumes had remained elevated relative to historical norms and seller supply and buyer demand was strong. Even so, demand outstripped supply, which created a fantastic valuation trend for sellers in which companies were transacting at higher premiums.
However, as you might suspect, the COVID-19 pandemic has significantly curtailed M&A activity for several weeks. You can probably guess why, but the two biggest variables impacting M&A activity in the lower-middle-market is a) general market uncertainty and b) lender’s willingness to finance transaction.
HOW BANKS HAVE REACTED
Traditional bank lending’s run of free-flowing liquidity for the purposes of funding acquisitions came to a fairly abrupt halt when the COVD-19 crisis started. In turn, banks have been preoccupied with behemoth-sized responsibility associated with the Paycheck Protection Program (PPP) loans placed on their doorstep by the U.S. government and the Small Business Administration. Almost overnight, banks became obsessed with administering these loans, and all pending and new opportunities took a back seat.
Now that the PPP program is losing some steam, banks have turned their focus to managing the forgiveness calculations associated with PPP loans, and frankly, they remain unsure how new loan business will be underwritten within the confines of their own banks, given the market uncertainty.
PRIVATE EQUITY IMPACT ON THE ECONOMY
In February, prior to COVID-19, consultants at Bain calculated that uncalled private equity capital – money that has been committed to private equity funds but has yet to be “called in” for its intended purpose (to invest) – had hit $2.5 trillion at the end of 2019.
Funds will need to put this money to work but they will undoubtedly also adapt their investment structures to address the uncertain market circumstances. The need to invest, and willingness to adapt will certainly aid the eventual M&A market rebound.
The good news is that economic fundamentals immediately before the COVID-19 crisis were strong, and even though it is safe to assume there will be a sizeable jolt in the first half of 2020, the impact will likely be short-lived, with a re-expanding U.S. GDP in the second half of 2020.
OUR OUTLOOK IS POSITIVE
We believe the pullback by traditional and non-traditional lenders will be short-lived once government-mandated lending is purged from their work streams and there is reasonable clarity about businesses reopening and various markets being restored. All these things should thaw the debt capital markets, even if at less aggressive underwriting standards. This bodes well for all buyers, which is even more true for private equity buyers.
STILL HAVE QUESTIONS OR CONCERNS?
Our team is happy to review your business situation and help determine if now is the right time for a private equity transaction. Please contact us or call (859) 445-2223.
PRIVATE EQUITY PLAYS AN ACTIVE ROLE
While the business climate has certainly changed, the current climate is actually a good time for businesses to be thinking about succession planning, and for investors to find companies with the right leadership and mindset for an equitable transaction.
Private equity is and will remain very open to new investment opportunities.
Just as in past economic contractions, it will take a very active role in supplying capital to business owners needing equity, whether for operations or for facilitating owner buyouts.
Roebling Capital Partners make controlling equity investments in lower-middle-market companies who wish to expand grow or sell their businesses.
ABOUT THE AUTHOR
Keith Carlson is co-founder and Managing Partner at Roebling Capital Partners, a lower-middle-market private equity investment firm.