Sellers need to get deals closed as soon as possible in order to maximize the chance that their sales proceeds will be earned under a lower capital gains regime. Eva Davis Co-Chair of Private Equity, Winston & Strawn
STAYING THE COURSE
Lawyers and other service providers may be ramping up staff to deal with skyrocketing deal flow, but private equity firms are remaining steady in terms of adding staff. Kulman says that his firm has added a few people over the last year and notes that, while the firm is fully staffed at the moment, it is looking to bring on additional resources in the next six months to expand the business development effort. Similarly, private investment firm VSS, having seen a 15% increase in the number of deals reviewed from 2019 to 2020— before the pandemic—has added a limited number of associates, according to Managing Partner Jeffrey Stevenson. Some firms have maintained that low interest rates, coupled with an abundance of capital on the sidelines and a shift toward a remote economy, have created a situation where the increase in deal volume has been normalized to a degree. “Before the pandemic, financial institutions had been expecting a market correction and investors were holding a lot of dry powder on the sidelines. Then, COVID hit and a number of opportunities emerged,” Randi Mason, the co-chair of Morrison Cohen’s corporate department, says. “First, there were companies that happened to be well positioned for the pandemic—offering virtual and remote products and services, such as Zoom and home fitness, personal health and PPE. Prior to COVID, there was a shift toward virtual
and remote businesses anyway. These businesses were established and COVID only accelerated the shift that had already been happening. Investors have been rushing to take advantage of these opportunities.” According to Mason, the availability of distressed assets owing to COVID has had an impact, too. “At the same time, there were businesses, like retail and hospitality, which were hit hard and distressed investors rushed in,” she says. “It’s a perfect storm in which there is a lot of capital available, there is a positive market disruption and a distressed market happening at once.” George Henry, managing director at private equity firm Lincolnshire Management, says that the number of deals his firm looks at has increased by 160% between 2018 and 2020, and limited the time available to review more complex opportunities. “We’ve remained disciplined and have even had to be ruthless in some ways,” Henry says. “We may have had to pass on deals where we ultimately know it is not a fit for us. In a less busy environment, we might take a little more time on those kinds of deals. Now, those are pushed to the side quickly.” Mason says that people are taking advantage of the “COVID bump” among businesses that have performed well because of the pandemic. “I think that some companies, investors and funds are now trying to sell before the effects of the COVID bump wane. The challenge for investors is trying to normalize and understand how much of a bubble the COVID bump really is,” Mason explains. She adds that there are also investors who are trying to find assets that are not overvalued because of COVID. “There’s so much competition for well-positioned businesses. People are looking for that gem that’s attractive, but not overvalued. In addition, lately we’re also seeing more and more capital taking advantage of distressed opportunities. It is becoming more clear who has weathered the storm and who has not. Sponsors and strategics are trying to pick up the ‘carcasses left on the side of the road.’” Kulman says that buyout activity is strong at Five Points Capital, which focuses on B2B services businesses, and that his firm has issued a record number
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