INVESTMENT BANKING In Perspective A Q&A with Stout’s Eric Welsch

Stout’s head of financial sponsors discusses guiding private equity clients through turbulent times

Q: How is the opportunity set for 2023 shaping up so far?

A: After 2021’s near-perfect capital market conditions shaped a year characterized by exceptionally favorable M&A and financing dynamics, we found that 2022 was characterized by disruption across many dimensions of the capital markets due to inflation, labor market constraints, rising rates, supply chain issues and broader geopolitical factors. The resulting volatility and uncertainty caused many business owners to pause to take stock of their own outlook and risk appetites, and to explore the nuances of buyer and seller expectations in a lower valuation environment partially impacted by less robust debt financing. Stout’s bankers have been focused on helping our clients properly assess their options and market conditions. As 2023 has begun, we are thoughtfully bringing several new opportunities to market and are in advanced discussions about many others.

Q: Which sectors do you expect will be more attractive this year and why?

A: I’ll call out two sectors of focus at Stout where we expect robust activity in 2023 and beyond. The first is in home healthcare, an area of expertise for us (led by John Calcagnini) that is attractive for private equity as it presents a lower-cost treatment setting compared with extended acute care hospital stays or longterm care settings like skilled nursing. Patients generally prefer to be at home, and providers with home health models can increasingly serve this growing demand. We are active with companies that utilize statesupported family caregiver models for the Medicaid population; skilled home care companies that provide higher acuity services; and private pay agencies.

Another area of strong activity for us that is attractive to private equity is auto aftermarket (led by Steve Rathbone). Growth is being driven in part by the increasing average age of vehicles on the road in the U.S., which in turn spurs demand for parts, repair and collision services, and wheel and tire replacement. Greater complexity and technological advancement in vehicles are also stimulating the need for more specialized and sophisticated collision, repair and maintenance services, benefiting scaled providers. E-commerce within the auto aftermarket space also continues to lead the sector from an overall growth rate perspective.

We are working with a variety of companies and sponsors across both home health and auto aftermarket as private equity firms seek opportunities to back innovators and consolidators in these growing and highly fragmented markets.

Q: What are you hearing from financial sponsors about their sentiment and willingness to do deals in the current environment?

A: Most financial sponsors we work with are eager to find unique, differentiated investment opportunities. There’s been much discussion over the years about the growing reserves of dry powder in private equity. And that’s certainly a factor supporting deal appetite. However, history and hindsight also tell us that some of the best private equity investments (and fund vintages) date to periods of economic disruption like the one we are in now. Sponsors know this and are focused on trying to not only pursue the best deals, but also on working with bankers to uncover hidden opportunities and strategic situations that might require more creativity. That doesn’t mean investors aren’t going to be disciplined in sale processes. In fact, it’s quite the opposite. We believe most private equity investors are leaning into their areas of past success and experience to find differentiated new investment opportunities. Similarly, with regard to exits, financial sponsors holding high-quality businesses will continue to have strong opportunities to sell.

Growing businesses that are winning based on differentiation, scale and consolidation opportunities are usually better positioned for success. Because private equity takes a relatively long-term view on creating value, paying up for great companies despite over-equitization and higher borrowing costs today still makes a lot of sense. For any given business, there are almost always several larger sponsors that see opportunity to back those businesses for the next four to six years to create even more value.

Q: What’s next for Stout’s financial sponsors group?

A: Since I joined Stout in 2022, our leadership team and I have been focused on hiring senior, experienced investment bankers into our financial sponsors group to lead and orchestrate strategic relationships with our priority sponsor clients. Our vision is to have a team of FSG bankers who are accomplished dealmakers acting as key trusted advisors to their sponsor clients and portfolio companies while working closely with our industry, product and capital markets bankers. This seamless collaboration across our broader investment banking team, as well as with our experts in our valuation advisory and transaction advisory businesses, will enable us to deliver a uniquely committed partnership experience to our clients.

Q: What’s your advice to younger people starting out in investment banking?

A: First off, be deliberate about the people you choose to work with and with whom you align yourself. Try to surround yourself with colleagues, clients and mentors who have positive energy and demonstrate good intentions in their work and interactions with others. Nurture those relationships and friendships, and find ways to build your career progression around them.

Secondly, obtain robust and varied deal experience across a variety of M&A transaction types, industries and across the capital markets, including the debt and equity capital, private capital and fundraising markets. It’s important to have a thorough understanding of how these financial markets fit together and impact M&A, especially in volatile periods like the one we’re in now.

Lastly, look for windows to create entrepreneurial opportunities alongside professional friends and partners when they present themselves. Don’t be afraid of taking risks and trying new things when you can leverage your capabilities, professional relationships and create clear value for yourself and other key stakeholders.

ERIC WELSCH is a managing director and head of financial sponsors in the investment banking group at Stout. He has over 20 years of experience in investment banking and capital markets.