Middle Market DealMaker // Fall 2022

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This issue also delves into innovation in the transportation industry. Our recurring Next Target column, in partnership with Grata, explores how new technologies can bolster traffic and pedestrian safety. And the Deal Roundup column talks about flourishing activity in transportation and logistics technology, with a look at companies that are using data, artificial intelligence, drones and other tools to upgrade a historically paper-based industry and help solve supply chain pain points.

MIDDLE MARKET DEALMAKER // Fall 2022 1

Some investors have been waiting for a downturn to pounce on dis tressed and special situations opportunities. The COVID-19 pandemic initially looked like it could be that event, but it only put an artificial pause on some auctions and affected a select crop of industries. The ongoing inflation and recession, though, could lead to more workouts, and experienced distressed investors are stepping up to the challenge. Still, experts quoted in our feature story on p. 46 caution that restruc turings can be incredibly complex, and new players wanting to take advantage of timely opportunities might not be successful.

MMG ONLINE middlemarketgrowth.org LINKEDIN Middle Market Growth Magazine TWITTER @ACG_MMG THE EDITOR

Innovation and Adaption

Our cover story in this issue tackles the topic of ESG. Screening for environmental, social and governance factors when approaching middle-market M&A seems like another hurdle for small companies to overcome amid a challenging market backdrop. But ESG experts think the increasing tendency to discuss ESG in the middle market actually shows a maturation in the industry.

ow that the U.S. is in a recession by some measures, public stocks are down, the Federal Reserve is raising interest rates and inflation is still a pressing concern for consumers, investors are becoming understandably cautious. Both fundraising and dealmaking in private equity are down this year, according to Preqin, and limited partners are getting more skittish about putting money to work in alter native investments, including PE.

But this doesn’t mean dealmakers can sit on the sidelines until the storm passes. Many are continuing to raise funds and make deals, but they have to show investors a differentiated approach in times like these. As our fundraising feature demonstrates, that could mean invest ing or collecting money abroad, offering LP-friendly fee structures or focusing on deep value investing.

Letter from

ANASTASIA DONDE Senior Editor, Middle Market adonde@acg.orgGrowth

N

While many of the deals in logistics technology are early-stage or ven ture investments, bankers and seasoned private equity firms tracking the space expect it to mature soon into a traditional private equity play.

Whether it’s investing in new technologies, evaluating ESG factors or pursuing distressed deals, investors and middle-market businesses are showing they’re willing to be creative in order to remain competitive. //

Letter from

When I first started at Trivest, I remember Mr. Powell telling our team: “Trivest should only be investing in businesses that we would be proud to own.” Businesses that adhere to good environmental practices, take care of their employees and are well governed are simply worth more to the next owner. ESG is, in many ways, a codification of doing business the “right way.”

The world continues to put the COVID-19 pandemic and its effects on the economy in the rearview mirror. Many middle-market portfolio companies have found ways to grow through these challenging times. Post-Labor Day brings many of us back to our offices in-person for multiple days per week. Our kids and their teachers are back in the classroom.Fallishistorically a very busy time in the middle market. If deals are to get done before the end of the year and fees earned/ bonuses paid, it is important to get to work now. The season is also busy with network ing and events. This summer, operating partners gearing up for the fall had a chance to study up at ACG’s Operators’ Summit: Accelerating Value Creation. The forum enjoyed an engaged audience, with 745 reg istered attendees and 141 one-on-one meetings. The event is just one example of ACG’s new offerings designed to reach corporate executives and PE operating partners.

Please enjoy this issue of Middle Market DealMaker magazine and its deep dive on the trends in ESG. We all continue to go through a lot of changes, and I remain confident in the middle market’s ability to sur vive and advance. //

A

THE CHAIRMAN

This edition of Middle Market DealMaker focuses on ESG. While a hot topic, in many ways ESG has long been a part of middle-market dealmaking.Mypartners and I at Trivest are stewards of a 41-year-old institution, and we were fortunate to learn many lessons from our founder, Earl Powell.

Season of Change

DAVID GERSHMAN Chairman, ACG Board of Directors, and Partner and General Counsel, Trivest Partners

While there are storm clouds everywhere—continued political divi siveness at home, Russia’s land-grab in the Ukraine, recession fears, lender apprehension, crushing inflation and labor shortages—there are also rays of light shining through.

s summer turns to fall, we can feel a shift of positive momen tum in the lower middle market. I have a strong sense that the middle market is doing what it always does, ignoring the noise, adapting to new realities and getting back to work.

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MIDDLE MARKET DEALMAKER // FALL 2022 EDITION

Investors that expected the pandemic to yield an abundance of opportunities in distressed assets were largely disappointed, but that’s beginning to change.

Twin Brook Capital Partners’ track record with midmarket sponsors shows why relationships matter.

The practice of evaluating individual companies’ environ mental, social and governance posture is no longer reserved for large corporations inter ested in appeasing sharehold ers. Today, ESG is influencing dealmaking in the middle mar ket in a real way, in everything from due diligence to valuation, even as prevailing standards and metrics continue to evolve.

52 IN FOCUS

PRESIDENT AND CEO Thomas Bohn, CAE, MBA tbohn@acg.org

ART DIRECTOR, ACG MEDIA Michelle mmcavoy@acg.orgMcAvoy

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SENIOR DIRECTOR, STRATEGIC DEVELOPMENT Kaitlyn Associationkgregorio@acg.orgGregorioforCorporate Growth

CHIEF OPERATING OFFICER Matthew Hickman, mhickman@acg.orgMBA

SENIOR EDITOR Anastasia adonde@acg.orgDonde

Printed in the United States of America. ISSN 2475-921X (print) ISSN 2475-9228 (online)

Copyrightwww.acg.orgmembership@acg.org2022

VICE PRESIDENT, ACG MEDIA Jackie jdantonio@acg.orgD’Antonio

DIGITAL EDITOR Carolyn cvallejo@acg.orgVallejo

Contents

FEATURES

CONTENT DIRECTOR Kathryn kmulligan@acg.orgMulligan

SENIOR VICE PRESIDENT, SALES Harry hnikpour@acg.orgNikpour

Middle Market Growth® and Association for Corporate Growth, Inc.® All rights reserved.

40 HOW ESG IS CHANGING THE M&A LANDSCAPE

46 CREST OF A WAVE

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middlemarketgrowth.org6 18 24 14 Contents TREND WATCH 10 Deal Roundup  14 In Perspective: Private Equity 18 In InvestmentPerspective:Banking 20 Focus on Fundraising 24 On the Move WHAT’S NEXT 30 Next Target: Traffic and Pedestrian Safety 34 Behind the Data: The Corp Dev Tech Stack

MIDDLE MARKET DEALMAKER // Fall 2022 7 46 5230 36 On the Horizon: Lake Placid vs. Lake Wobegon 38 On the Horizon: The Lending Climate FEATURES 40 How ESG Is Changing the M&A Landscape 46 Crest of a Wave 52 In Focus: Twin Brook Capital Partners THE WRAP-UP 58 ACG Events  62 Backstage: Cyndx 68 Key Takeaways

Wall Street capabilities. Main Street sensibilities. Support to navigate your industry’s landscape.

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ON THE MOVE

IN PRIVATEPERSPECTIVE:EQUITY

20

Trend Watch

18

Fulcrum Equity Partners’ Chad Hooker explains how his firm works with physician practices to scale the business and create value.

FOCUS ON FUNDRAISING

Investors tap into logistics technology companies to solve supply chain problems.

IN INVESTMENTPERSPECTIVE:BANKING

Guggenheim Partners’ Chris Macios discusses drivers for successful transaction outcomes in a challenging market.

A look at how private equity fundraising fared in the second quarter of 2022.

24 1014

DEAL ROUNDUP

Recent hires and promotions among middlemarket investors and advisors.

MIDDLE MARKET DEALMAKER // Fall 2022 9

THE LATEST IN DEALS, FUNDRAISING AND PEOPLE MOVES IN THE MIDDLE MARKET

I

The COVID-19 pandemic and subsequent supply chain crisis shone a light on inefficiencies in the transportation industry. Now technology companies and their investors are helping solve the problem

in Transportation and Logistics Investment Banking at Capstone Partners. “The logistics world was pretty antiquated with many compa nies working on paper systems. A lot of VCs looked at it and said, ‘This is ripe for disruption.’”

middlemarketgrowth.org10

Roundup DEAL

A lot of recent investment has popped up via venture capital and early-stage growth equity, as well as strategics looking to bolster their platforms, sector advisors say. Many logistics technology companies are poised to grow and become targets for

DRIVING INTO THE FUTURE OF TRANSPORTATION

BY ANASTASIA DONDE

nvestors and advisors tracking the transportation and logistics sector have long believed that the industry needs upgrades, since many com panies operate in an old-fashioned way—with paper-based record-keep ing and little reliance on technology. The supply chain issues that followed the COVID-19 pandemic exacerbated these problems and set the sector up for a “COVIDtransformation.turnedthe spotlight on supply chain in every business,” says Nathan Feldman, vice president

Now telematics companies are helping track moving vehicles’ loca tion in real time. Data and analytics can also help predict an asset’s repair needs, when it will need work and how much time or expense it will take. “People are buying new less and fixing up more,” Kaiser says.

Venture Capital Activity

Much of the recent investment in transportation and logistics technol ogy has come through venture capital and early-stage investment rounds. According to Capstone’s research, the fundraising in logistics technology reached record levels last year, with tracking and telematics companies, as well as warehousing and inventory management businesses, seeing the most activity. Companies raising additional rounds of capital included digital warehousing and distribution network developer Stord, which received $90 million from Kleiner Perkins, and web-based transporta tion management platform Emerge, which garnered $130 million of Series B venture funding from Tiger Global Management and 9Yards Capital.

Sector advisors think the flurry of VC activity means that many of these businesses will soon graduate to become private equity targets. “Most of these businesses will need

Houlihan began to see a shift toward more technology adoption among transportation and logistics

Uptick in Investment

transportation management software and telematics services, which track cars, trucks and other equipment by using GPS and on-board diagnostics to plot the asset’s trajectory on dig italAccordingmaps. to Houlihan Lokey, since 2019 there have been more than 200 M&A transactions in this market in the U.S. with an aggregate value of around $80 billion.

companies back around 2016 and 2017. “Many legacy vendors, repair shops, operators of ports and termi nals, and fleet-management compa nies were all running on paper-based models,” says Shane Kaiser, manag ing director in the bank’s technol ogy group. Houlihan had a thesis that technology would transform all modes of transportation. “The pandemic accelerated the need for technology to promote e-commerce. Some of the hiccups and pain points in supply chain management led to questions on how to aggregate and make sense of data,” Kaiser says.

MIDDLE MARKET DEALMAKER // Fall 2022 11

traditional private equity M&A. Some of this activity is already underway at platforms owned by the likes of Vista Equity Partners, Thoma Bravo and others.

According to Capstone’s research, about $10 billion of venture capital went into 240 companies in the past two years in transportation and logis tics technology in North America. Some of that activity has been around data companies, artificial intelligence,

automotive industry. It was acquired by Vista in 2015.

Project44 has also made a series of its own acquisitions before and after this financing round. Last year, it acquired Convey, Ocean Insights and ClearMetal. In April, the company bought Potsdam, Germany-based based Synfioo, a provider of visibility and arrival estimates for rail freight deliveries in Europe.

middlemarketgrowth.org12

ANASTASIA DONDE is Middle Market Growth’s senior editor.

Large transportation or technology companies—some private equitybacked—have also been active in the sector, buying up startups to bolster their digital offerings. Vista Equity Partners has made a slew of acquisitions in the space, and has tacked on multiple companies to its Solera platform, including Omnitracs, eDriving and Spireon. Texas-based Solera provides risk management and asset protection software to the

Thoma Bravo has made many other acquisitions in the sector, including Auctane (formerly Stamps.com), a shipping and fulfillment software company; Command Alkon, a con struction supplier collaboration platform focused on heavy building materials; and Elemica, a cloud-based digital supply network for process manufacturing industries.

Sector advisors often cite Project44 as a notable success story in the sector that has grown quickly and attracted capital from sophisticated investors. Devor is among those who see it as a likely candidate for an eventual public listing: “Given the significant growth that lies ahead for the company, an IPO would be a natural exit.” //

“The industry is evolving rapidly, and we expect to see further invest ment activity as logistics technology companies mature and the solutions they provide become even more capable and critical for businesses navigating the complexities of the global supply chain,” says Ross Devor, partner at Thoma Bravo.

to exit at some point and will be M&A candidates rather than go the IPO route,” says Capstone’s Feldman. These companies could be a good fit for the traditional private equity play of merging sizeable businesses or using a larger platform for tacking on add-ons, he adds.

Strategic and PE Involvement

In anticipation of increased M&A activity in logistics and transportation technology, investment bankers are making more of a concerted effort to cover the space. At Capstone, it’s “something we’re actively pushing into,” says HoulihanFeldman.Lokeyalso recently launched dedicated coverage of trans portation technology, whose appli cations span automotive, aviation, heavy/construction equipment, mari time, public transit, rail, supply chain and logistics, and trucking. “Across all modes of transportation, this is an exciting time for technological development with rapid innovation in maintenance and repair, enterprise resource planning, transportation management systems, telematics, e-commerce and risk management,” a June report from the bank said. “Specific market tailwinds driving investment and tech adoption across the broader market include labor supply dislocation, new sustainability regulations and increased asset com plexity,” according to the report.

Some of the hiccups and pain points in supply chain management led to questions on how to aggregate and make sense of data.

J.D. Power, the Thoma Bravo-backed consumer research company, has also been acquisitive in the sector. This year it bought Tail Light, an automotive software company, and We Predict, a U.K.-based provider of global automo bile service and warranty analytics.

SHANE KAISER Managing Director, Houlihan Lokey

Project44 Case Study

One of the biggest investments in the sector this year was the $420 mil lion funding round into Project44, a supply chain visibility platform, led by Thoma Bravo, TPG and Goldman Sachs Asset Management in January. Six other venture capital investors joined the financing, giving the company a $2.2 billion valuation. The Chicago-based company tracks more than 1 billion global shipments annually.“Supply chains are increasingly complex and globally distributed, and data-driven networks like Project44 are critical in helping businesses meet the increasing demands of customers and overcome the logistical chal lenges of today’s world,” Devor says.

E2Open (NYSE: ETWO), another strategic acquirer active in the area, bought Logistyx Technologies in March. E2Open is a network-based supply chain management platform, while Logistyx offers parcel and e-commerce shipping and fulfillment technology.According to Houlihan Lokey’s research, Accel-KKR, Vista Equity Partners and Thoma Bravo have been some of the most active private equity players in the sector, making 15-20 investments each in transportation technology companies since 2019.

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This landscape presents an oppor tunity for physician practices and growth equity investors to expand their relationship. Private practices can more easily meet growing demand while retaining clinical autonomy. Meanwhile, investors can help improve the operations of an essential industry and expand access to com munities across the country.

BY CHAD PRINCIPAL,HOOKER,FULCRUM EQUITY PARTNERS

A

Scaling Physician Practices to Increase Value

The team at Fulcrum Equity Partners has participated in several platform investments involving physician practices. Through that experience, we’ve established a road map for evaluating investment oppor tunities, scaling their operations and

positioning the practice for further growth after we exit. Here’s what we’ve learned over the years.

TECHNOLOGY: Modern tech nology is key to running a healthcare support platform efficiently. Tools include a digital patient portal, an automated marketing system, a secure electronic health record system and financial systems for accounting, patient billing and payments, and any other tools that contribute to revenue cycle management.

The quality of a management ser vices organization (MSO) platform can directly impact value and growth opportunities, so it’s important to con sider when evaluating a deal. Here are the essential features of a healthcare support platform for physician prac tices, and what we look for in each:

MIDDLE MARKET DEALMAKER // Fall 2022 15

s the healthcare industry grows and evolves, so does the need for more efficient healthcare delivery—especially with increasingly complex compliance and regulatory guidelines.

COMPLIANCE: Compliance efforts should include conducting a quarterly claims audit and meeting regulatory and medical necessity requirements. It’s also important that the organization reviews coding, sub mission and reimbursement of claims to check for documentation error and overpayment. Regular and rigorous internal reviews are critical.

FULCRUM EQUITY PARTNERS Keith Negley

Illustration by

PATIENT EXPERIENCE: The first step to evaluating a practice is examin ing its patient experience. At Fulcrum, we look at the platform’s quality scoring through a variety of lenses. How does the provider communi cate with a patient? How clearly is patient-critical information explained? How is care coordinated and how

MARKETING: Marketing will help the practice grow and maintain a positive reputation. The organization should use a diverse set of methods, including educational information, reputation management and thought leadership content, as well as search engine optimization and search engine marketing. The organization

How to Evaluate a Healthcare Services Deal

PRIVATE EQUITY In Perspective

easy is it to schedule an appointment? Finally, we explore the level of patient engagement and patient outcomes. These criteria will establish the overall health of the practice and can be used as guidance in patient-retention pre dictions. If the platform has satisfied patients, there is a solid foundation for future growth.

PEOPLE: Having the right people in the organization is essential. This means setting up teams for financial operations, payer contracting, report ing and analytics, and HR and benefits administration. They should have knowledge of the requirements and processes specific to healthcare.

The first step to evaluating a practice is examining its experience.patient

aspects are that building a patient base and setting up licenses and payor contracts can take a long time. It is important to start early, develop rela tionships with referral partners, pro mote the opening and create a strong physical and digital presence.

With a centralized organization to provide these services, practices will have a solid foundation for expansion efforts, which can take several forms:

Acquisitions are often the fastest method for expanding into a new area or market. The acquiring practice has immediate access to the patient base and payor contracts. With a refined MSO in place, an acquired entity won’t require an overhaul. The acquiring practice integrates the target’s operations into its already defined and streamlined management capabilities, as well as its support and technology infrastructure.

should also prioritize the network of referral relationships, includ ing expanding and nurturing that network.

It is exciting to see the opportu nities available in the healthcare industry. M&A’s evolving role plays a huge part in scaling physician prac tices, and the behind-the-scenes work of compliance, business services and healthcare management keeps physi cian practices running and growing. Investors serve an important function in the industry today, by helping prac tices expand quality healthcare access to communities that need it. //

middlemarketgrowth.org16 TREND WATCH // In Perspective

In addition to growth, we often work with physicians on establishing an independent MSO or BSO (business services organization) to centralize administrative work and manage back-office functions. This relation ship allows providers to focus on providing care while lowering costs through operational improvements. Those improvements include central izing core administrative functions; enhancing branding and marketing initiatives; creating a five-star com pliance program; and investing in technology, systems and people.

Establishing a Strong Foundation and Growing a Practice

EXPANSION: Expansion can mean expanding your existing locations or de novo expansion. Existing location growth options include improving care and customer experience, adding days of service and increasing catchment area—especially by improving referral relationships. De novo expansion lets practices enter a market by estab lishing a new location. The positives are that the practice has control over site selection, branding, and building and design. It can also use the site as a playbook for growth. The negative

Preparing for an Exit and Beyond

MERGERS AND ACQUISITIONS:

The combined entity will be set up for success with a single set of processes and tools, despite having a presence in multiple markets, a more complex revenue cycle, and a larger and more diverse patient base.

CHAD HOOKER is a principal for Fulcrum Equity Partners. He focuses on evaluating new investment opportunities, performing due diligence on companies that meet the fund’s criteria and supporting portfolio companies with their growth initiatives. Hooker also works closely with Fulcrum’s investments in Summit Spine and Joint Centers and Texas Endovascular Associates.

Introducing ancillary services can provide additional revenue streams,

ANCILLARY SERVICES:

but more importantly, improve the patient experience. Plus, a com prehensive care approach can help distinguish a practice from other pro viders. Ancillary services can include physical therapy, pharmacy, labora tory and imaging services, among others. Offering these services in one location saves patients travel time, reduces costs and improves patient outcomes.Important considerations when offering ancillary services include whether the services fit into the prac tice’s clinical workflow, how accessi ble the service is to patients without your offering, whether you have the resources to make it successful and your ability to comply with neces sary compliance, billing and coding requirements.

Our firm helps professionalize small physician practices for further growth. As part of that, we help uncover exit opportunities using improvements in the platform’s MSO to pave the way for value creation, often by investing in people and technology. Physicians usually retain a significant equity stake in the MSO in our model.

Other considerations when pre paring for an exit include collecting key data, understanding valuation and determining exit type, usually choosing between the next stage in financial backing or merging with a larger platform.

And we help make it happen. When you join ACG as a member, you gain access to the exclusive network and benefit from the connections that ACG actively facilitates.

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INVESTMENT BANKING In Perspective

W

How some businesses and investors are maintaining M&A momentum against a challenging market backdrop

BY CHRIS GUGGENHEIMMANAGINGMACIOS,DIRECTOR,SECURITIES

Forging a Cautious Path

hile uncertainty has slowed the pace of dealmaking in 2022, at Guggenheim Securities, we are seeing areas of continued activity with cautious opti mism when gauging the remainder of the year and into 2023. More impor tantly, we have identified some busi ness attributes and process dynamics commonly seen in successful private company M&A transactions.

Despite these challenges, we observe continued success for select private company M&A transactions at compelling valuations. In these instances, we point to a handful of key business characteristics and pro cess considerations that are driving optimal outcomes with both private equity and corporate acquirers.

Recurring Revenue Business Models

middlemarketgrowth.org18

Still, the M&A landscape remains challenging, as macroeconomic factors like inflation and rising interest rates create a cooling effect on both the pub lic and private markets. PE investment committees are underwriting recession cases and raising the bar on diligence and asset quality, while sellers are hes itant to bring businesses to market in an uncertain pricing environment.

Strong revenue visibility and margin sustainability are increasingly critical for buyers in the face of near-term eco nomic uncertainty. Due to the asym metrical risk that private equity firms assume in the early stages of a hold period (where a performance misstep out of the gate is very challenging to recover from), businesses with longterm, contractual client arrangements afford buyers more comfort in bridging forward-looking earnings projections and de-risking their investments.

GUGGENHEIM SECURITIES

via add-ons often supersedes organic growth on the priority list.

While we don’t expect that funda mental strategy to dissipate anytime soon, we are seeing a shift toward buyers prioritizing organic growth and placing a premium on businesses that can meet performance expecta tions regardless of their acquisition pipeline. A sound organic growth strategy backed up by historical per formance is a key value driver even for platform investments today.

Operational competency and execu tion alone are not enough for busi nesses looking to achieve premium outcomes. PE buyers are requiring CEOs who can effectively articulate and execute a strategic vision to build conviction and transact at higher valuations in the current uncertain macro environment.

A Well-Designed Process

Cautious Optimism

CHRIS MACIOS is a managing director covering financial sponsors at investment banking and capital markets firm Guggenheim Securities. He was also recognized by Middle Market Growth as an Investment Banking Professional to Watch.

MIDDLE MARKET DEALMAKER // Fall 2022 19

front and center for investors across a range of sectors and end markets.

For services businesses in particular, technology is no longer a “nice-tohave.” It is now a critical component of core business functionality and client-facing service delivery models.

Recurring revenue business mod els have long garnered the highest valuations and been the most sought after across the private equity commu nity. Now, these revenue models are as important for risk mitigation as they are for value maximization.

angles and connectivity into sectors and businesses well in advance of sale processes. Now more than ever, it is critical that M&A advisors design processes to take advantage of these dynamics. Identifying the highest probability buyers—those with vetted angles and a path to winning—and targeting them early with diligence packages, access to management and third-party reports can strengthen the overall health of a process and often yield value-maximizing results.

Tech as a Core Principle

Financing Is Key

Executive leadership is more important than ever, as private equity firms place greater value on backing highperforming, vision-centric management teams with long-term corporate strategies and deep benches of talent.

Growth vs. Platform

Visionary Leadership

While transaction volume is moder ating and the valuation environment is under pressure, high-quality assets that meet key criteria continue to achieve optimal outcomes through thoughtful, well-run processes. //

The “platform” transaction is a well-trodden path in the private equity playbook. Businesses posi tioned as platforms with clear opportunities for aggressive add-on M&A historically garner premium valuations with PE buyers—growth

While certainty of financing is often difficult to achieve in the earlier stages of a process, anything that can be done to mitigate this concern will help drive optimal transaction outcomes. Staple financings have his torically brought a high degree of cer tainty to a process; however, financing sources are having a harder time pro viding and maintaining constructive terms in light of market fluctuations and macroeconomic challenges.

It is important, however, to seek early price discovery with potentially preemptive buyers and to maintain workflow momentum throughout key points in the process. Through the balance of the year, we believe highquality assets will more frequently approach a small handful of wellqualified prospective buyers to test the waters in advance of fully launching processes, with the option to defer broader marketing until a later date.

The outlook for private company M&A remains strong despite nearterm economic uncertainty. Private equity firms are sitting on record amounts of dry powder that need to be deployed regardless of where we sit in a cycle. Corporates continue to prioritize areas for strategic invest ment and aggressively pursue these areas through M&A.

We’ve seen continued strength in the M&A market for businesses that demonstrate strong, highly functional adoption of technology, as well as businesses that provide consultative digital transformation services to enterprise and SMB clients.

Digital transformation technology-enablementandtrends are

When the public equity markets fal tered earlier this year, the debt markets were quick to follow. After nearly two years of widely available credit with low rates and all-time high leverage levels, financing is now a key area of consideration—and often concern—for any contemplated M&A transaction.

Over the last several years, private equity has increasingly sought to develop proprietary and advantaged

In many instances, the most suc cessful transactions are benefiting from supportive incumbent lenders willing to engage with prospective buyers early and support a change of control transaction. We believe M&A processes that can take advantage of those lender dynamics will achieve better overall transaction execution and benefit from greater certainty of outcome.

middlemarketgrowth.org20

Fundraising

W

BY ANASTASIA DONDE

Most of the fortoughanmakingCoastwiththequarterraisedmid-marketlargerfundsinthesecondcamefromEastCoast,severalWestplayersalsothelistinincreasinglyenvironmentfundraising

hile fundraising is getting more challenging amid a backdrop of market headwinds, several well-known middle-market firms were successful in raising capital in the second quarter, mainly from return investors and some international players. Most of the funds raised in Q2 came from wellentrenched East Coast investors, while several notable firms on the West Coast made the list too. Rounding out our highlighted fundraisers were two firms from St. Louis and Denver. Overall, fundraising was down in Q2 compared to the prior quarter and last year, mainly driven by a “riskoff environment,” where investors focus on safer assets like bonds and de-emphasize equities or alternative investments. This is amid concerns about inflation, a recession, the war in Ukraine, dislocation in the energy markets and other factors. Overall, U.S. middle-market private equity funds raised $29.9 billion in the second quar ter, compared to $42.8 billion in the first quarter of this year, according to Preqin. Year-over-year, the amount is also down as compared to $38.8 billion collected in the second quarter of 2021.

“Risk assets are having a rough

Familiar Names on the East Coast

EAST COAST FIRMS DOMINATE

Q2 CAPITAL COLLECTION

FOCUS ON

ride in 2022. The outbreak of war in Ukraine has exacerbated existing inflationary concerns and prompted risk-off sentiment across global finan cial markets,” says Preqin’s Private Equity Q2 2022 report. “At the same time, higher interest rate expectations have crystalized into higher long-term bond yields as the Federal Reserve has taken aggressive action to rein in excessDespiteliquidity.”theseheadwinds, multiple private equity firms around the coun try managed to collect oversubscribed funds in the second quarter. Some of them credit their successes to re-ups with existing investors, international LPs and closely targeted relationships.

Six of the 11 funds highlighted in this quarter’s fundraising report are wellknown firms on the East Coast that are returning for consecutive funds, whether it’s their sixth, seventh or even 10th fundraise. One Equity Partners in New York closed its One Equity Partners VIII fund at $2.75 bil lion, while Ridgemont Equity Partners in Charlotte, North Carolina, closed on $1.75 billion for a fourth fund.

Trivest Partners Trivest Fund VII 950 2022 Buyout Diversified Miami, FL

line of funds does the same while targeting smaller businesses with $4 million in EBITDA or less.

One PartnersEquity One Equity Partners VIII 2750 2021 Buyout technologyhealthcareIndustrials,and New York, NY

Compass Group Equity Partners Compass Group Fund II 255 2022 Buyout servicesconsumerbusinessdistribution;andManufacturingand St. Louis, MO

The Highlights: Middle-market private equity funds closed in Q2 2022

Fund Manager Fund mn)SizeCloseFinal(USD

Vintage Strategy Core Sector Headquarters

middlemarketgrowth.org22 TREND WATCH // Focus on Fundraising

Ridgemont Equity Partners IV 1750 2022 Buyout Diversified Charlotte, NC ManagementInvestmentGeneration

PrivateNovaQuestEquity

David Lippin, managing director and head of investor relations at One Equity Partners, agrees that the market has been tough for fundraising so far this year. “There is a traffic jam of funds trying to raise money,” he says. One issue driving the decline in

Generation IM Sustainable Solutions Fund IV 1700 2021 Growth investingSustainable San Francisco, CA

NovaQuest Private Equity Fund II 500 2018 Buyout Healthcare Raleigh, NC

PartnersRallyday Rallyday Partners Fund II 205 2022 Growth Diversified Denver, CO

Sources: Preqin Pro, press releases

EquityRidgemontPartners

HGGC HGGC Fund IV 2540 2022 Buyout Diversified Palo Alto, CA

Quad-C Partners in Charlottesville, Virginia, was successful in collecting $1.7 billion for its 10th fund. Further down the East Coast, Trivest Partners closed two new funds, the Trivest Fund VII and Trivest Discovery Fund II, in May at $950 million and $600 million, respectively. The firm focuses on founder-owned businesses in its main fund/strategy. The Discovery

ManagementQuad-C Quad-C Partners X 1700 2021 Buyout Diversified VACharlottesville, Blue PartnersCapitalWolf Blue Wolf Capital Fund V 1100 2022 Buyout andHealthcareindustrials New York, NY

FFL Partners FFL Capital Partners V 900 2022 Growth servicesenabledandHealthcaretech- San Francisco, CA

“Despite a crowded private equity fundraising market, Trivest received significant support from both its estab lished investor base and a select group of new investors,” a press release from the firm says. “Both funds include a diversified mix of limited partners

including endowments, corporate and public pensions, insurance companies, funds of funds and family offices.”

wealth funds, insurance companies and other institutions, according to a press release from the firm. Like One Equity, HGGC boasts a group of international investors including those from North America, Europe, the Middle East and Asia. HGGC is focused on four sectors in the middle market: business and tech-enabled services, consumer, financial services, and software and technology.

Rallyday also merged with Parkpoint Advisors, a private equity firm in Portland, Oregon, in July. Parkpoint is an independent sponsor that didn’t have committed capital yet. “We are getting a great team and we’re giving them capital in exchange,” says Heckman. Parkpoint’s employees are relocating from Portland to Denver. //

The New York-based firm, which spun out of JPMorgan in 2015, takes a value investing approach and is disciplined on price, according to Lippin. While valuation multiples have been heating up across indus tries, One Equity tends to stick to the 6x-7x range on deals where others might pay a 10x multiple. The firm has also been focusing on corporate carve-outs as companies ramp up sell ing non-core businesses. Some of its recent investments include building products companies and healthcareat-home businesses. “We’re more interested in the steady-eddy type businesses rather than sexy software companies,” Lippin says.

Nearby in San Francisco, FFL Partners closed its FFL Capital Partners V fund at $900 million in May. The firm focuses on healthcare and tech-enabled services compa nies. Similar to FFL’s prior funds, Fund V will continue to make equity investments ranging from $50 million to $200 million in control or signifi cant minority stake transactions, an announcement from the firm said.

MIDDLE MARKET DEALMAKER // Fall 2022 23

A Duo of Fund IIs Elsewhere in the country, Compass Group Equity Partners and Rallyday Partners both raised their second funds. St. Louis-based Compass Group collected $255 million in May, while Denver-based Rallyday Partners received $205 million for its Rallyday Partners Fund II in April.

West Coast Techies

The approach resonated with inves tors. The firm raised its second fund in just three months. The money was predominantly raised from re-ups, with four new LPs coming into the fold. The firm targeted endowments, founda tions and family offices. “We purposely targeted LPs [investors] that found ers would admire,” Heckman says. Rallyday is a generalist investor that targets “founders that want to elevate their industry and build business mod els that are doing something magically different,” Heckman explains.

FFL has already invested in multiple businesses through Fund V, including Velocity Global, New Look Vision Group, One Senior Care, Community Medical Services, Optomi Professional Services and Perlman Clinic. “The firm strives to invest in marketleading companies that have strong and defensible competitive positions, good growth prospects, muted cyclicality and strong management teams,” FFL’s announcement says.

As the value of public stocks has declined this year, institutional inves tors appear underexposed to public equities and overexposed to private equity as a percentage of their portfo lios. As such, they are being cautious about putting any more money to work in private equity. “If they were going to add relationships, it’s mostly re-ups and, even in that case, they’re going to cull some names,” Lippin says.

overall fundraising is the “denomina tor effect,” he explains.

Rallyday’s founders were all CEOs and business builders prior to starting the firm, so they wanted to build a “by founders, for founders type of investment firm that would have been helpful to us when we were building our companies,” Heckman says.

businesses and consumer services. Its main targets are founder-owned businesses that are seeking their first institutional equity, where the founder usually rolls over a significant amount of equity, says Managing Partner John Huhn. “The goal is to take these businesses, grow EBITDA and achieve multiple arbitrage,” he adds.

Rallyday Partners, meanwhile, offers investors a friendlier fee structure. “We have more upside in exchange for lower management fees,” says Managing Partner Ryan Heckman. The firm also has an LP advisory committee, which acts like a company board and approves the firm’s budget and executive salaries.

ANASTASIA DONDE is Middle Market Growth’s senior editor.

Compass Group received invest ments from a diverse group of LPs including family offices, pension funds, funds of funds, insurance companies and individual retire ment accounts. Compass invests in manufacturing and distribution

Still, One Equity had an oversub scribed fund and raised money over its initial hard-cap. The firm received strong support from existing investors as well as LPs in overseas markets in Asia and the Middle East, Lippin says.

On the other hand, some of the funds collected by West Coast investors in the second quarter do focus more on “sexy software” and have been suc cessful in their specialty in the heart land of technology. HGGC closed its HGGC Fund IV at $2.54 billion in June. The fund was oversubscribed versus its $2.25 billion target. The Palo Alto, California-based firm raised its fund through a variety of LPs, including pension funds, sovereign

In 2020, Sciola was named a winner of the ACG Middle Market Growth Young Professional Award, to recognize her career accomplishments.

Texas-based independent accounting and advi sory firm Calvetti Ferguson promoted Anneka Sciola to advisory partner in its Houston office, where she leads the firm’s valuation and trans action service practice. She specializes in valu ations, sell-side representation and transaction services, quality of earnings, financial expert wit ness consulting and testimony, and bankruptcy andBeforerestructuring. joiningCalvetti Ferguson, she was a senior associate, transaction and restructuring, at KPMG.

MOVE On the

New York-based private investment firm VSS Capital Partners appointed W. Preston Hutchings as senior advisor. In his new role, he will focus on strategic guidance.

middlemarketgrowth.org24

Celeste Owens joined Rolling Meadows, Illinoisbased global insurance brokerage, risk manage ment and consulting firm Gallagher as senior vice president for Gallagher specialty products.

Before joining Gallagher, she was senior vice president of Cincinnati-based full-service risk management, employee benefits and insurance solutions partner Hauser and senior M&A analyst at New York-based global insurance firm AIG, where she developed an understanding of representation and warranties insurance policies and the under writing process. She has also worked at J.P. Morgan in corporate and investment bank compliance.

Before his current role with VSS Capital, he was senior vice president and chief investment officer at Mid Ocean Reinsurance until its acqui sition by XL Capital. Prior to Mid Ocean, he was a senior vice president and chief investment officer of Renaissance Reinsurance.

W. PRESTON HUTCHINGS

Hutchings was also a senior vice president and chief investment officer at Arch Capital Group. He began his career as a municipal bond trader at J.P. Morgan.

ANNEKA SCIOLA

CELESTE OWENS

Hutchings currently serves as chairman of Saïd Holdings, a private family office based in Hamilton, Bermuda. He also serves as chairman of China Car Park, an entity that invests in parking lot businesses in mainland China and is managed by LimeTree Capital, a Hong Kong-based private equity firm for which Hutchings is a senior advisor.

Denver-based alternative asset manager Bow River Capital hired Ryan Weinberg as vice presi dent on the software growth equity team. He is focusing on sourcing new business opportunities, conducting in-depth due diligence and managing dealPriorworkflow.  tojoining Bow River Capital, Weinberg was a senior associate on the software growth equity team at Kayne Partners. He started his career at Piper Jaffray as an investment banking analyst in the technology group and then served as a private equity associate at Diversis Capital. He also worked at Siemer & Associates as an investment banking summer analyst.

Investment bank Raymond James hired Brian Murchie as managing director in the firm’s finan cial sponsors investment banking team.

BRIAN MURCHIE

HEATH HUNTER

He develops Raymond James’ relationships with private equity firms located primarily on the West Coast and in the South.

Murchie joined Raymond James from St. Louisbased Stifel Financial Corp.’s financial sponsors group. Prior to that, he served as a vice president at Beverly Hills, California-based Platinum Equity, where he was responsible for deal origination and managing strategic relationships with corporate sellers and investment banks.

St. Louis-based private equity firm Broadview Group Holdings added Heath Hunter as a principal to its investment team. Before join ing Broadview, he was vice president of cor porate development at Dot Family Holdings, where he focused on control buyouts of middle-market distribution companies.

MIDDLE MARKET DEALMAKER // Fall 2022 25

RYAN WEINBERG

Prior to Dot Family Holdings, Hunter was a vice president at Chicago-based private equity firm Prospect Partners, where he identified and executed both platform and add-on acquisitions and provided board leadership and strategic guidance to numer ous lower middle-market companies. He was also a management consultant with PwC in its Chicago office.

During this time at Dot Family Holdings, he led five different platforms and numerous complementary acquisitions.

TREND WATCH // On the Move

ERIN LANSKY AND MILLER NORMAN

West Palm Beach-based Blue Sea Capital pro moted Erin Lansky and Miller Norman to princi pal. Both work in the lower middle-market firm’s healthcare investment team and assist in identi fying, evaluating and executing opportunities, as well as providing ongoing support to portfolio companies.  Lanskyjoined Blue Sea in 2020 and has served as co-lead on a platform and six add-on acquisi tions. Before joining Blue Sea, Lansky was vice president at Lake Forest, Illinois-based private equity firm RoundTable Healthcare Partners. Before that, she was president at Chicago-based private equity group BDT Capital Partners and an associate in GTCR’s healthcare team.

Norman joined Blue Sea in 2017 and has worked across five platform investments, 25 add-on acquisitions and two successful exits. Before joining Blue Sea, he was an associate at New York-based private equity firm Odyssey Investment Partners and an investment banking analyst at Barclays.

ERIKA GUCFA

Minneapolis area-based North Sky Capital hired Erika Gucfa as a managing director to lead North Sky’s business development efforts for its flag ship

Previously,strategies. she was the head of private mar kets, product strategy and solutions for the Americas for Scotland-based investment com pany Abrdn. She focused on developing new and customized investment solutions for strategic clients in the U.S., Canada and South America with a focus on global real assets. Prior to that, she worked at Stanford, Connecticut-based FLAG Capital Management and New York-based Forum Capital Partners.

He began his career as a special agent for the Federal Bureau of Investigation. He is also a senior lecturer of innovation and technology at Cornell University’s Samuel Curtis Johnson Graduate School of Management.

Desiree Castillejos has been appointed vice president, business development and strategy for Europe, Middle East and Africa, and Latin America at Johnson Controls, the publicly listed (NYSE:JCI) $24 billion international producer of fire, HVAC, security systems, controls and related digital solutions for buildings. In her new role, Castillejos will spearhead the mergers and acquisitions pro gram for those regions. The company is highly acquisitive and wants to continue to build its capabilities globally. Castillejos joins the cor porate M&A team from Kimball Electronics, where she served as chief strategy officer and vice president of corporate development.

Before joining Great Hill Partners, he was execu tive vice president at Utah-based fintech company Acima. He was also CEO of Aon Cyber Solutions, CEO of B2R Finance and a senior advisor at private equity firm Tritium Partners, where he focused on investments in fintech as well as information and digital services.  Before that, he held executive posi tions at American Express and MBNA, and founded Revolution Money, a financial services company that was acquired by American Express.

MIDDLE MARKET DEALMAKER // Fall 2022 27

BILL HAVERLAND AND CASEY CARROLL

JASON HOGG

DESIREE CASTILLEJOS

Boston-based private equity firm Great Hill Partners hired Jason Hogg as an executive-in-residence. He will identify and pursue investment opportunities with a focus on financial technology, insurance technology, cyber insurance and software.

Houston-based Stellus Capital Management hired Bill Haverland as principal and Casey Carroll as vice president of investor relations.

In his new role, Haverland is focusing on building private equity relationships in the Northeast and Mid-Atlantic. Before Stellus, he was executive director in Fifth Third Bank’s Technology, Media and Telecom Group, where he focused on private equity coverage from 2017 to 2022. He was also a member of the investment banking team responsi ble for originating and executing M&A transactions.

Prior to Stellus, Carroll was the vice president of investor relations at West Palm Beach private equity firm Comvest Partners, where he was involved in all aspects of IR with a focus on insti tutional fundraising for the firm’s private credit and private equity strategies.

Prior to that, he was a senior vice president of production and development at Culver City, California-based Straight Up Films, where he was involved in fundraising, financial structuring and production for the firm’s slate of films.

GRATA.COM

With unparalleled information and access to the private economy, Grata unlocks opportunities and gives dealmakers the competitive edge.

Unlock the middle market with Grata

ON THE HORIZON

3430 3638

NEXT TARGET

Grata’s Nevin Raj examines the technology solutions used by corporate development teams.

The CEO of WhiteHorse looks at lending trends and how the current downturn differs from the Great Recession.

INDUSTRIES AND TRENDS IN DEAL SOURCING

ON THE HORIZON

A look at the bifurcated M&A market and what the data reveals about valuations across two classes of companies.

MIDDLE MARKET DEALMAKER // Fall 2022 29

A burgeoning industry around pedestrian safety yields new investment opportunities.

What’s Next

BEHIND THE DATA

EMERGING

GREENLIGHTGIVINGTHETOTRAFFICANDPEDESTRIANSAFETYINNOVATION

BY CAROLYN VALLEJO

Street Capital, says the traffic and pedestrian safety market today is awash with opportunity for investors that want to support its growth.

T

Last May, Vance Street launched its own traffic safety platform, follow ing the acquisition of solar-powered traffic safety system manufacturer Carmanah Technologies, which it merged with Polara Enterprises, a company that develops accessible

Biden last year includes $1.55 billion for National Highway Traffic Safety Administration programs, a more than 50% increase to its budget, which the agency says will allow it to make its “most historic and largest investment into vehicle and highway traffic

TRAFFIC

companies operating within the traffic and pedestrian safety space

raffic safety has come a long way since seat belts were first intro duced in vehicles in the mid-1900s. From airbags to anti-lock brakes and lane assist, innovation has dramat ically elevated driver and passen gerButsafety.there has been a glaring omission within the market, says Chuck Gershman, president, CEO and co-founder of safety technology company Owl Autonomous Imaging (Owl“WithAI).occupant safety, the numbers are staggering in terms of how well the industry has done to make vehi cles safer for drivers and passengers,” he tells Middle Market DealMaker. “But virtually no regulation or emphasis in the last 30 years has been put in place regarding pedestrian safety.”

Increasingly,safety.”

Last year, Nonantum Capital Partners acquired traffic control solu tions provider Helix Traffic Solutions. In March, RoadSafe Traffic Systems, backed by Investcorp and Trilantic North America, acquired Liddell Bros., a business that offers traffic safety solutions ranging from signage installation to accident recovery.

“Investors broadly have a variety of different options in terms of where to play in the traffic safety space,” he says. “It is a space with a lot of growth and increasing budgets that try to influence a lot of change.”

A search in Grata, a private company intelligence engine for middle-market dealmakers, yields 3,247 companies operating within the traffic and pedestrian safety space today, more than 98% of which are private. Their technology offerings range from sensors within crosswalks to artificial intelligence-powered street signs.

According to Sandbo, private equity investment in the space has been “a little bit nascent,” with early-stage businesses relying on venture capital to grow. Yet increased awareness of the pedestrian safety problem, cou pled with rising government funding, is generating a wave of support for industry innovators. The $1 trillion infrastructure bill signed by President

PEDESTRIANANDSAFETYCOMPANYSIZEOWNERSHIP3,247

private investors are recognizing the opportunity to sup port the pedestrian safety industry’s growth. “There is a lot of runway, and people are becoming more and more aware of this technology,” Sandbo says.

Recent data from the U.S. National Highway Traffic Safety Administration shows that death tolls on the road are rising. According to the latest data from the agency, traffic deaths reached a 20-year high in Q1 2022, with a 7% increase in fatalities compared to the same period in 2021.

A Grata search found 98% of companies operating within the traffic and pedestrian safety space are private

Hitting the Gas on Innovation

Luckily, innovators are working to reverse that trend. Steve Sandbo, partner at private equity firm Vance

middlemarketgrowth.org32 What’s Next // Next Target

Owl AI embraces a surge in government funding for pedestrian safety technology as PE investors perk up to the market

Until recently, he says, manufactur ers have relied on legacy sensor per ception capabilities, despite knowing about their limitations. Autonomous vehicle developers had hoped lidar would suffice to supplement radar and visual cameras, but with the latest traffic safety data pointing to a serious problem, Gershman says the industry can no longer turn a blind eye to the issue.

At present, Vance Street is focused on software and hardware designed to make crosswalks safer, according to Sandbo, but the breadth and variety of the traffic and pedestrian safety market means there is a company for every level of investor appetite.

Sensing Opportunity

CAROLYN VALLEJO is Middle Market Growth’s digital editor.

MIDDLE MARKET DEALMAKER // Fall 2022 33

Renewed support for innovation from the automotive industry has also played a vital role in Owl AI’s growth.

According to Gershman, consumers and insurance companies have histor ically been the most fervent support ers for pedestrian safety innovation. But he points to the strengthening government support for traffic safety solutions as having an especially large impact on the market.

“Atimpact.theend of the day, our company will save a lot of lives,” Gershman says. “We’re completely focused on leverag ing our technology for safety.” //

auto manufacturers but also pro viders of the sensory technology. Gershman points to the opportunity to wield Owl AI’s technology within the development of smart cities as another growth avenue, noting that the company is currently in talks with oneStill,municipality.barriersto entry are high for developers of new pedestrian safety solutions, given the lives at stake.

Amid mounting public scrutiny about the reliability of automatic driver assistance systems, it’s imperative that innovators’ solutions are as failproof as possible before launch. Gershman says that a bit more technological innova tion, combined with a maturation of customers’ adoption of Owl AI hard ware and software, will be important to lowering the company’s risk profile.

“We did gap analysis around what sensors could produce under certain environmental conditions, or day or night conditions, and it was our thesis that any amount of software, no matter how good, was not going to compensate for the lack of sensor response, and that the sensor mix was incomplete,” Gershman explains.

Owl AI occupies a different corner of the traffic and pedestrian safety market, in 3D imaging. The company completed its Series A funding round to the tune of $15 million earlier this year, led by State Farm Ventures.

He adds that a bit of introspection enabled the AV market to acknowledge legacy technologies’ shortcomings and to embrace improvements in safety technology through the addition of tools like thermal technology, as in the case of Owl AI’s products. That, cou pled with regulators’ renewed focus on safety, has helped Owl AI to grow from seven employees last year to an expected 34 by the end of 2022.

Partnerships have been key to the company’s growth, not only with

At the end of the day our company will save a lot of lives. We’re completely focused on leveraging our technology for safety.

crosswalk systems for pedestrians with disabilities. Soon after, Vance Street expanded the platform with its acquisition of Eberle Design, which provides intersection safety solutions.

That investment came just a few years after Gershman first incorpo rated Owl AI, in 2018, having iden tified persistent shortcomings with visual cameras mixed with radar (which determines the distance of objects using radio waves) and lidar (which detects object distance using lasers). Those deficiencies resulted in tools that often fail in low light and poor weather conditions.

CHUCK GERSHMAN President, CEO and Co-founder, Owl AI

According to Owl AI, its 3D thermal imaging solution, paired with artificial intelligence, elevates the accuracy of individual and object detection and recognition, regardless of visual con ditions. The solution also enhances the technology’s ability to determine the distance and velocity of an object, like a pedestrian or deer. It can be used in autonomous vehicles, among other potential applications.

But it’s a matter of “when,” not “if,” says Gershman, and eventual buy-in from customers and the public sphere will be important for future fundraising, including from private equity backers looking to make a pos itive

George Gould, senior vice president of corporate development and partner alliances at Azul, initially thought sourcing would require a dedi cated person—someone to take lists of 800 or more companies and manu ally apply them to the organization’s ideal company profile.ButwithGrata,Gould didn’t need another employee. The process that he anticipated taking days took hours

THE DATA Behind

1. Making the most of limited resources.

When you’re no longer a team of one, logging the stages of each deal’s life

middlemarketgrowth.org34

2. Maintaining a single source of truth.

Last month, I wrote an article called “When It Comes to Tech, Corporate Development Teams Are Playing Catch Up.” Consider this Part 2 in an epic saga.PE firms continue to lead the way on M&A technology, but there are corpo rate development leaders rising to the challenge. And thanks to our friends at Office Hours, a research tool connect ing professionals through on-demand, expert interviews, we had the chance to talk to some of the pioneers of cor porate dealmaking.

All the corp dev experts we inter viewed used some combination of these resources, but we found technol ogy use was expanding to solve three major problems felt by corp dev teams:

What’s in a Typical Corp Dev Tech Stack?

NEVIN RAJ COO, Grata

Quelling this fear requires exten sive knowledge of the market and the right tools in the sourcing toolkit. The most common deal origination tools mentioned in our interviews were Pitchbook, Grata, Crunchbase, LinkedIn Pro and CapIQ.

How corporate development leaders are rising to the challenge

For the large teams, consulting becomes a bigger part of the bud get. The toolkit expanded to include

“Youinstead.needto be diligent in refining your targeted list, which requires con tinuous filtering and refinement at the top of your sourcing funnel. Vetting new companies can impact our greater organization from our executive team to our product managers. Sourcing efficiency is everything,” says Gould.

Content Provided by ACG Partners and Featured Firms

Gartner, 451 Research, Forrester, GLG and Coleman Research.

Times Are a-Changin’

Through our interviews, we quickly discovered that a corp dev profession al’s greatest fear is being approached by an executive or board member inquiring about a company they’ve never heard of: the dreaded, “Hey, we saw Company X acquired Company Y. Why weren’t we bidding on it?”

From our interviews, there was no clear answer as to which platform was most helpful to corp dev project management. One of the corp dev vice

MIDDLE MARKET DEALMAKER // Fall 2022 35

3. Establishing communication between departments.

teams, it is much more common to see a Google, Smartsheet or Asana form where coworkers submit company rec ommendations in a more structured way.

Maintaining communication between corp dev teams and their counterparts in sales, product and customer service is crucial. They are the boots on the ground, hearing about the organization’s competitors and collaborators directly from clients. For a small team, the occasional Slack message or email from a coworker is manageable; for larger

Shreyans Parekh, director of strategic initiatives and corporate develop ment at a Fortune 200 commercial real estate firm, strives to strike the right balance between two extremes he’s seen during his years of working in investment banking and corporate development: “One side is too much technology, with no strategy for how to use it,” he says. “The other, a resource ful team with too little technology to analyze the larger market picture.”

cycle becomes essential—a single source of truth that answers: Who’s been contacted? Who signed an NDA? Which deals fell through and why?

To solve this problem, teams have leaned on non-industry-specific project management tools like Smartsheet or Airtable, or more expensive, but M&Aspecific, deal flow trackers like Midaxo.

The forms vary in detail: Some are as simple as “Company Name” and “Company URL”; others are more in-depth, including questions around why the suggested company fits into the parent company’s overall strategy.

Here’s how to walk the line: Break down your budget by deal stage. Understand where you’re spending the most and how it’s con tributing to your deal flow.

Having this kind of form allows all internal requests to live in one place where they can quickly be found, pri oritized and deduplicated against the organization’s sourcing efforts.

presidents at a large tech company put it best: “Your tool is only as good as your team. The biggest problem with tech tools is the data entry. There has to be a carrot-and-stick approach to new technology to make sure you’re getting the most out of it.”

Excel spreadsheets can’t convey all the information corp dev teams need to make informed decisions. M&A tech is no longer just nice to have, and the lead ers embracing it will come out on top. //

How Do You Strike the Right Balance?

Give your entire team a voice. Take a collaborative approach to adopting new technology. Develop processes for evaluating tools and allowing feedback to come from the bottom-up as well as top-down.

Sixty percent of corp dev teams are tracking this through Excel, but a growing number of teams can no longer ignore that Excel doesn’t offer reporting (on an individual and team level) or automatic notifications.

NEVIN RAJ is the chief operating officer and co-founder of Grata, a private company intelligence engine for middle-market dealmakers.

BOB DUNN Managing Director, GF Data

A tale of two markets G F Data’s just-released second quarter report returns us to a well-developed truism—that the M&A market is a bifurcated one, with more and less favored businesses receiving markedly different valuations, debt support and levels of buyer interest.

shows a high-level picture drawing on data from our quarterly reports and reveals some interesting insights about the two worlds.

Diving Deeper

Lake Wobegon vs. Lake Placid

Of the two worlds we’re seeing, one com prises businesses with above-average financial characteristics, generally reflecting more attractive industry niches and growth pros pects. We’ll call that “Wobegon”—in honor of the exceptional stock of Lake Wobegon residents in “A Prairie Home Companion.”

The incidence of “above-average” deals also crept up over this 18-month period. The 63% figure for 1H 2021 was itself a historic high. The customary figure going back to 2003 is in the 57%-58% range. At the same time, the quality premium—the spread between valu ations in Wobegon and Placid—ticked down from two turns to 1.6x.

We believe both numbers reflect the most vexing variable in charting deal trends over time: the deals that don’t get done. As the market normalized, more attractive businesses sold easily. Companies facing difficulties accelerated or magnified by the pandemic faced a more difficult choice: Trade at the current market-clearing price or remain on the sidelines and hope for a better day. A certain number chose—or are still choosing—not to transact. Their absence from the completed deal data drives up Wobegon’s share of volume and holds aloft average multiples in Placid.

HORIZON On the

In the context of an unprecedented global health crisis and ongoing macroeconomic complexity, this observation seems truer than ever—so true that it occurred to us that it might be interesting to look at the data as describing not one world, but two.

In both Wobegon and Placid, valuations and volume edged up in the second half of 2021, driven by the torrent of completed deal activity as the market found its post-pandemic footing.

A regular feature of our reports is a delinea tion between above-average financial perform ers and other businesses being acquired by financial sponsors. We make these designations based on trailing 12-month EBITDA margins and revenue growth, with some editorial judg ment based on other company characteristics. (As a refresher, GF Data collects and reports on platform and add-on acquisitions completed by private equity funds and other deal sponsors in the $10 million to $250 million enterprise value range. Over the course of this year, we’re extending the range to $500 million.)

Isolating and taking a deeper dive into the two worlds affords some other observations: Valuation multiples for the first half of 2021 point to substantial activity in Placid involving companies trading from positions of weak ness rather than strength. In the $100 million to $250 million deal size bracket, the average multiple for that period was 6.0x. This is not a typo. Companies that believed a rebound was coming and could afford to wait did.

The other world includes companies with lesser margins and growth rates, prone to more restrained valuations. But—especially in frothy markets—miracles can happen. Let’s go with “Placid” for that group, a nod to the 1980 U.S. Olympic hockey team.

Looking at three six-month periods going back to the beginning of 2021, the chart above

GF DATA

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GREENBERGANDY Founder, GF Data

In 2022 so far, there is virtually no difference in total debt load on deals financed with a unitranche product—the average is in the low 4x for both cohorts. However, in deals financed with senior debt only (no sub debt) the average in Placid is 3.2x compared to 4.1x in Wobegon.

ANDY GREENBERG is founder and BOB DUNN is managing director of GF Data, an ACG company and the leading provider of information on private transactions in the $10 million to $500 million value range.

(preserving/specialty foods)—achieved the same volume threshold.

Of the business categories most populous in our data set, two—manufacturing and busi ness services—followed the valuation trajec tory described above in both environments. Multiples peaked in 2Q 2021, and then held their ground in 1Q 2022. Healthcare services showed continued strength in valuation in the year to Distributiondate. presents a different picture. Valuations fell in Placid by about a turn, from 6.5x-6.6x in 2021 to 5.5x in 2022 YTD. In Wobegon, average pricing for distribution deals was 7.4x in the first half of this year, about in line with the average last year. The roster of most active NAICS groups in 1H ’22 included two prominent distributor classes, NAICS 4234 (commercial equipment and supplies) and 4238 (machinery, equipment and supplies). Buyers are clearly rewarding distributors that have proved their resilience the past 30 Manufacturingmonths.appears to be the category most hobbled by inflation, supply chain issues and distortion in year-over-year financial results. The 1H 2021 most-active list featured four manufacturing groupings; in 1H 2022, only one manufacturing grouping—3114

Greenberg is also CEO of Greenberg Variations Capital, a mergers and acquisitions advisory firm devoted to one-off or targeted transactions. For more information, visit gfdata.com greenbergvariations.com.or

1H 2021 2H 2021 1H 2022 1H 2021 2H 2021 1H 2022 WOBEGON 8.0x 8.2x 7.9x 137 165 87 PLACID 6.0x 6.4x 6.3x 79 85 42 SPREADPREMIUM”)(“QUALITY 2.0x 1.8x 1.6x (WOBEGON)ABOVE-AVERAGESHARE 63% 66% 68%

VALUATIONS

VOLUME

MIDDLE MARKET DEALMAKER // Fall 2022 37

Debt utilization continues to drive and parallel asset values. We certainly hear anecdotal reports about lenders pulling back on debt levels—but see little impact from this in the second quarter numbers. Total debt multiples have remained virtually unchanged year over year.

As the extended seller’s market soldiered on in 2018-19, bank lenders became compet itive on a selective basis with the non-bank lenders that had by then come to dominate the private leverage finance market. After the profound disruption of 2020-21, game pieces returned to the board in more or less the same places. If the debt market becomes more selective, though, we would not be sur prised if stand-alone senior financing for good but not great businesses is one of the first pieces to come off. //

While year-to-date completed deal volume is clearly down, it is not down equally. As one would expect given the above analysis, the drop is steeper among the lesser performers. In Placid, completed deal volume in 1H 2022 was 53% of activity in the year-ago period. In Wobegon, it was 64%.

Who moved from one world to the other? The broader NAICS 811 category (repair and maintenance) was on Placid’s most-active list in the first half of 2021 but appears on Wobegon’s list for the year to date. This may be an early example of movement to sectors more defensive in nature.

Despite Recession, Lenders Want to Put Money to Work

Significant long-term committed capital in the direct lending market: One of the hallmarks of the Great Recession was a liquid ity crisis. Lax lending standards and massive leverage froze financial markets. Only because of unprecedented government intervention did the markets eventually unfreeze. So far in this economic downturn, regulated entities are not as overextended. In addition, there are tens of billions of dollars of committed long-term capital controlled by direct lenders, which are providing liquidity to the leveraged finance markets at pricing 50 to 200 basis points above the 2021 lows.

to the Great Recession, most of the lending market was controlled by financing firms that did not hold the long-term credit risk and therefore were looser with these add-backs and synergies. But over the past 10 years with the emergence of long-term direct lenders, more intense credit scrutiny has been given to these adjustments and add-backs, resulting in credits that are likely to perform closer to projected levels.

Robust employment: In many ways, today’s recession is a “textbook” recession— an overheated economy creates inflation, and the Fed steps in to cool the economy by raising interest rates and tightening monetary policy. That said, each recession is different and so far, this one is characterized by a strong job market. There are many theories for why the economy remains at essentially full employment and that could change, but whatever the reason, the strong labor market could maintain support for consumer spend ing and keep the recession comparatively shallow.Inshort, while we do expect the eco nomic downturn to continue for the next 12-24 months, middle-market executives should look upon today’s economic circum stances with less trepidation than the Great Recession. Direct lenders have liquidity and continue to actively put that money to work in support of solid credits. //

ARONSONSTUART Executive Managing Director and CEO, WhiteHorse

HORIZON the

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On

ith inflation running at a 40-year high, and the Federal Reserve commit ted to raising interest rates to cool demand and rein in inflation, it’s no surprise that the U.S. economy tipped into a recession in the second quarter. The big question is how deep the downturn will become, as many recall with trepidation the Great Recession from 2007-2009.Theeconomic backdrop today differs markedly from the Great Recession. During the Great Recession, there was a near shutdown of liquidity. In comparison, many sectors of the direct lending market remain open and functioning today. We believe strong middlemarket and lower mid-market companies will continue to have access to financing for strategic acquisitions and other priorities. Some key trends to consider include:

STUART ARONSON is executive managing director and CEO of WhiteHorse, which provides senior and second lien debt for refinancing, growth capital, acquisitions, buyouts and balance sheet recapitalizations for middle-market companies in the United States, Canada and Europe.

Aggressive lending practices: A mis take lenders have repeated through multiple cycles is heavily adjusting EBITDA by adding cost synergies, revenue synergies and cost take-outs. In the past, many of these syn ergies and add-backs did not materialize, resulting in overleveraged companies. Prior

WHITEHORSE

W

THE LATEST ON INVESTMENT OPPORTUNITIES AND RISKS There’s forappetiteanESG deals in the U.S., but there’s a mismatch in finding those deals right now.

Twin Brook Capital Partners' track record shows the power of strong relationships.

IN FOCUS

COVER STORY

TREND FEATURE

Investor Relations Director, Sustainable Development Capital

MIDDLE MARKET DEALMAKER // Fall 2022 39 Features 524640

FRANCESCA LORENZINI

Why investors in distressed assets may finally have their moment.

How ESG is changing the M&A landscape.

middlemarketgrowth.org40 STORY Cover

ESG has graduated from a reference in the financial statements of major corporations to a barometer for the health and long-term prospects of any business valued by investors

WRITTEN BY Britt Tunick Erica

IsHowChanging Landscapethe M&AESG

U

social and governance lenses has evolved. ESG is no longer a token inclusion within the financial reports of major corporations; now, these factors can determine an organization’s valuation and grind M&A deals to a halt.

Therebusinesses.hasalso been a movement away from the perception that the benefits of a strong ESG profile are limited to businesses directly tied to the environment. “ESG analysis needs to be done across asset classes, whether or not an investor is an impact investor or a sustainable investor,” says Erika Karp, executive managing director and chief impact officer of Pathstone, a family office advisory firm. “I would argue that ESG analysis must be done to get a full picture of risk adjusted returns— it’s a fiduciary responsibility for an advisor to do it.”

SHIFTING PRIORITIES: E, S OR G?

nderstanding the growing importance of environmental, social and corporate governance (ESG) in the world of merg ers and acquisitions requires looking no further than social media. Countless posts on these social platforms demon strate society’s rising concerns around sustain ability standards and corporate accountability. In fact, Elon Musk’s recent attempt to acquire Twitter is the perfect example of the reach that ESG has in today’s M&A market and the broader busi nessTwitterworld.is the most high-profile acquisition on the rocks right now. While the primary reason Musk has cited for backing away from the deal is his allegation that the social media platform is infected with bots that impact fake news and, ultimately, the company’s valuation, he has pointed to diversity concerns. “Musk has tweeted fre quently about Twitter employing workers who are insufficiently diverse in embracing a wide variety of viewpoints and perspectives,” says Dr. Michael Kraten, an ESG expert and professor of accounting at Houston Baptist University. “Ironically, the lack of diversity that he mentions involves a lack of conservative and libertarian representation.” He suggests Musk’s concerns represent issues around the G in ESG.

Preserving the environment may be the first thing that comes to mind when most people think about ESG, yet all three factors are equally important for companies and investors alike when looking to identify risks a business could face.

Karp notes that ESG is ultimately a proxy for quality, innovation and resilience that, when handled correctly, incorporates forward-looking factors that can impact companies, such as how they plan to approach artificial intelligence and even quantum computing. “Right now, there’s this massive, orchestrated campaign to discredit the work of ESG analysis. But the truth is, those who are slamming on ESG are being ideological and, frankly, ignorant,” she says. If a company can’t demonstrate a strong understanding of the environment and social issues in which it operates, Karp believes that is a major red flag signaling governance issues.

middlemarketgrowth.org42 Features // Cover Story

In the nearly two decades since the term ESG first entered the vernacular, the practice of looking at individual companies through environmental,

“We’re seeing a shift in folks considering ESG, not only because it’s the right thing to do, but because it will make businesses more success ful in the future. … In the private equity sphere, more and more people are seeing the true value in ESG and have gotten away from the ‘check the box’ exercise that existed five or 10 years ago,” says Madelyn Tutewiler, vice president of ESG at MiddleGround Capital, a private equity firm specializing in control equity investment in mid dle-market B2B industrial and specialty distribu tion

The components of ESG that are most in vogue are constantly shifting, but investors and compa nies alike have moved beyond viewing the stan dards as just another item to check off in the deal process to something that adds intrinsic value. Politics, ever-changing regulations and even the economic environment may color the way deals are evaluated at any given time. Still, the importance of ESG continues to grow, with the European Union leading the direction for where standards are head ing. While countless metrics and organizations specializing in ESG due diligence have sprung up to meet rising demand, a major gap remains in the cri teria used to rate ESG for major organizations and middle-market companies. As general partners and limited partners struggle to sift through the myriad components that comprise today’s ESG, one thing is clear: It isn’t going away and social pressures are proving to be the greatest driver of ESG adoption.

is, ‘Will this company help or harm valuation or growth?’ Not, ‘How does this company rate on an ESG scale?’” she says.

MIDDLE MARKET DEALMAKER // Fall 2022 43

MADELYN TUTEWILER Vice President of ESG, MiddleGround Capital

So far, it’s rare for ESG concerns to hold up middle-market deals. “In the lower- and middlemiddle-market, the aim is to invest in businesses with high growth potential, so anything that is a potential drag on valuation and growth is looked at closely. That includes ESG-related liability and reputational issues,” says Randi Mason, co-head of the corporate practice at law firm Morrison Cohen, who specializes in the middle market and advises many clients on ESG-related matters.

While the standards for middle-market compa nies may be different than for their larger peers, investors are outright excluding some of the most controversial categories of businesses from their investment portfolios—producers of firearms and weapons, tobacco products, and oil and gas, for example. Instead, many are seeking value among promising businesses that might need to work on their ESG factors.

We’re seeing a shift in folks considering ESG, not only because it’s the right thing to do, but because it will make businesses more successful in the future.

something equally appalling occurs in the area of social justice, the S pops up. And whenever a major corporate scandal explodes across the headlines, the G takes Accordingpriority.” toDaveBrown, a partner in law firm Alston & Bird’s Washington, D.C., office who specializes in M&A, the governance aspect of ESG is so deeply entrenched into due diligence that it typically takes care of itself in dealmaking. Because of that he says ESG due diligence currently focuses on the social and environmental components. “The trend is to engage in E&S diligence much earlier in the process. The focus is on understanding and mitigating risk,” says Brown, noting that ESG dili gence typically doesn’t add time or additional costs to a deal process, though it ultimately depends on the industry. “Making money in the short and medium term is the goal, and ESG issues should not get in the way of that,” he says.

However, she says buyers are not holding middle-market companies to the same standards as major organizations or slowing deals to shore up ESG factors. “The lens through which investors, other than impact investors, tend to look at things

Still, there is typically one aspect of ESG that dominates headlines at any point in time. Under the Trump administration, environmental con cerns were top of mind, as more than 100 environ mental rules were weakened, reversed or outright revoked. But the onset of the COVID-19 pandemic, coupled with the death of George Floyd at the hands of a Minneapolis police officer, brought greater emphasis to social considerations, such as diversity, equity and inclusion (DEI) and social equality.Thependulum continues to swing in response to recent events. “Each time there is a killer heatwave, an enormous terrifying wildfire or the evaporation of a body of water (like the Colorado River) that we rely on for survival, the E becomes ever more prominent,” says Kraten. “Each time

“We do utilize negative screening in assessing opportunities; however, there are assets where we see significant value in investing the cap ital to improve their ESG performance,” says MiddleGround Capital’s Tutewiler, adding that her firm is currently developing an ESG the sis that will specifically target businesses that meet

SCREENING FOR ESG FACTORS IN THE MIDDLE MARKET

A strong ESG profile is not just a measure of risk management and due diligence; it can also lead to a premium price for companies being acquired. “We’re starting to see this early evolution where ESG is moving beyond a buzzword. It’s becoming an ethos of how the best modern companies are run, and that’s starting to be embedded into opera tions. A good company is just going to have strong ESG practices, full stop,” says Max Hong, CEO of Malk Partners, one of the largest ESG manage ment consultancy firms that specializes in serving middle-market private equity firms. While not all investors have been quick to embrace ESG, he says there are many cases where investors are paying a premium for companies with strong ESG profiles.

There is no shortage of metrics that investors and companies can rely on for determining the strength of an M&A target’s ESG practices. The four most common metrics investors currently use are The Global Reporting Initiative (GRI); the Sustainable Accounting Standards Board (SASB); the United Nations’ Sustainable Development Goals (SDGs);

One example investors point to is shoe company

a critical need for a productive society in the future, but that may need significant investment in ESG.

DUE DILIGENCE BEST PRACTICES

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Allbirds, which has built its business entirely around eco-friendly materials and a sustainable supply chain. Having a strong ESG set of practices that are well beyond anyone else in the industry has helped Allbirds differentiate itself and garner a premium for the company. Following its November 2021 IPO, Allbirds saw its valuation skyrocket to more than $4 billion.

Investors are not only looking at ESG regarding M&A targets but also focusing the microscope on their own operations as well. “One of the ways ESG is affecting our business and our fundraising has to do with how diverse our investment committee and investment management teams are. This impacts the companies that we look at,” says Lorenzini.

As investors seek deals and companies look for funding from the private equity world, ESG will be a major determinant of how things play out. Consumers, particularly younger generations, have made it clear that ESG factors are firmly on their radar and something they will increasingly take businesses to task on. While inflation and a reces sion could see consumers shift their wallets toward less expensive, less sustainable brands, any such change is unlikely to last.

If the Data Convergence Project can right-size and standardize metrics that are more appropriate for middle-market companies and evolve into a more robust set of metrics over time, Hong believes it will help drive greater adoption.

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With hundreds of firms now specializing in different components of ESG compliance and due diligence, it has become commonplace for investors to use these organizations to supplement their own risk reviews when evaluating potential M&A targets.

and the Task Force on Climate-Related Financial Disclosures (TCFD). The first three are compre hensive and universal systems, while the latter focuses solely on climate change. The problem is, while these metrics are extremely comprehensive, they are more relevant for major corporations and tend to be overkill for middle-market companies.

There is an industry consortium of LPs and GPs that The Carlyle Group and the pension fund CalPERS are spearheading, called the Data Convergence Project, which is a working group of about 200 private market participants that are try ing to develop a core set of metrics, Hong explains.

“One of the temptations as everyone is still getting used to this—particularly in the mid- and lower middle-market, is that they will try and apply a standard or an entire set of metrics that may be appropriate for a large company to a much smaller company,” says Ethan Klemperer, a senior operating executive and head of the operating team at Monomoy Capital Partners. “What ends up happening is: You don’t have real adoption and it’s not really meaningful because people are just filling this out to check a box.”

“All the firms who are emerging in this space are val idation that ESG’s a growing market,” says Hong. He points to Accenture’s strategic investment in ESG data platform PulsESG and Blackstone Energy Partners’ acquisition of energy and sustainability consulting firm Geosyntec as recent examples.

“People around the world are growing increas ingly concerned about things like climate change and racial justice. I think there could continue to be increasing pressure on companies to do better in these areas, in spite of macroeconomic condi tions,” says law firm Morrison Cohen’s Mason. //

The legislation that Sustainable Development Capital believes will have the biggest impact is the EU Commission’s Fit for 55 Agenda, which aims to reduce greenhouse gas emissions by at least 55% by 2030, and the REPowerEU plan, which aims to make Europe independent from Russian fossil fuels before 2030.

BRITT ERICA TUNICK is an award-winning journalist with extensive experience writing about the financial industry and alternative investing.

INTERNATIONAL STANDARDS

One way that investors and companies have offset the massive amount of work needed to gauge a company’s ESG health is by employing ESGspecific consultants and advisors that have sprung up to meet demand. “There’s a huge service indus try that’s burgeoning that has to do with ensuring that companies are compliant with different ESG standards, both domestically and globally,” says Francesca Lorenzini, investor relations director for alternative investment management firm Sustainable Development Capital.

Not surprisingly, the European Union is leagues ahead of the United States on the ESG front. As a result, investors and companies wondering where regulations may ultimately be headed in the U.S. are best served by looking to the EU as a guide. “In the U.S., we’re still trying to understand whether we care about ESG and whether or not this is a real, existential threat to the financial services commu nity,” says Lorenzini. “When I speak with investors, they often say ‘There’s just not a lot of clean energy or ESG deals that look really good.’ But I think there are. There’s an appetite for ESG deals in the U.S., but there’s a mismatch in finding those deals right now.”

Wave

CRESTOFA

Investors focused on special situations and distressed assets have been on the hunt for deals since COVID-19 struck without much to show for it, but that could be changing

middlemarketgrowth.org46 STORY Feature

WRITTEN BY Bailey McCann

ILLUSTRATIONS BY Jay Vollmar & Rob Dobi

having, it’s beginning to look like it’s not a matter of ‘if’ but a matter of when we start to see more widespread distress in companies,” says Lawrence Perkins, founder and CEO of SierraConstellation Partners, a middle-market special situations firm. “We’ve been in an environment where the focus is on liquidity solutions—really special situations-type investing. But we’ve started to see that shift over the past three to four months. Companies are running into limits in terms of what added costs they can pass on to customers.

Given where we are and the conversations we’re having, it’s beginning to look like it’s not a matter of ‘if’ but a matter of when we start to see more widespread distress in LAWRENCEcompanies.PERKINS

That activity suggests the skepticism about investment opportunities in distressed assets is wearing“Givenoff.where we are and the conversations we’re

Even though businesses generally tend to be better capitalized and better managed than they have been during previous bouts of uncertainty, the sheer number of challenges companies are facing today will make it tricky for even the richest businesses to come through unscathed. Inflation, supply chain issues and a tight labor market are all eating into margins and liquidity. Even if these factors begin to normalize, it may be short lived. Geopolitical concerns, including the war in Ukraine and increasing tensions with China, could lead to downstream impacts to supply chain with the potential to propel commodity prices upward byWhilewinter.economists

he joke is that distressed investors have called 13 of the last three recessions. So when certain fund managers start going around to investors saying, “This time it’s different,” naturally there’s a bit of Valuationsskepticism.andbalance sheets have proven rel atively resilient since the start of the most recent financial crisis. The pandemic led to a fresh round of distressed and special situations fundraising only for much of that capital to remain on the sidelines as stimulus programs helped businesses muddle through. But this time, maybe it really is different.

T

middlemarketgrowth.org48 Features // Trend Story

A number of veteran distressed and special situations funds have just closed or are currently in the market and scouting for opportunities. Firms including Avenue Capital Group and OakTree Capital Management are reportedly pitching new funds to investors. Victor Khosla’s SVPGlobal has set its sights on dislocation in the aviation market over the last year and half, by deploying more than $2.5 billion in aircraft-related investments as of July. At the beginning of August, deep-value shop Banner Ridge Investors closed an oversubscribed $639 mil lion fund to chase distressed and special situations investments—its fourth fund close since June 2019.

Founder and SierraConstellationCEO, Partners

debate whether the U.S. is technically in a recession, companies are fac ing a number of challenges that might not show up in GDP figures right away. That hasn’t gone unnoticed by investors seeking businesses on the rocks.

fuel, food and housing costs have pulled back on discretionary spending. The prevailing vibe says recession, even if the data can’t concretely back it up.

Ann Miller, managing director and co-head of the special situations practice at advisory firm Stout, says that the pullback is putting pressure on consumer discretionary companies like retailers and travel and leisure businesses. Real estate has also been hit hard as buyers and sellers grow wary of rising rates.

BAD VIBES

Liquidity is tightening. There is just more pres sure now.”

Economists have been quick to argue that, despite negative GDP figures this year, the robust labor market and low corporate default rate make it difficult to say definitively whether the U.S. is in a recession. However, consumer sentiment may tell us more. Consumers faced with rising

MIDDLE MARKET DEALMAKER // Fall 2022 49

For fund managers and investors looking at the opportunity set among businesses in distress, there are a number of ways to get involved. Much of the money raised during the pandemic is still sitting on the sidelines, and many of those funds are designed to be liquidity providers—either through loan-to-own arrangements or simply as a financing provider.“Veteran teams are always going to find ways to invest and make a return, but there are more opportunities now for everyone,” says Stout’s Miller. “We’re seeing increased activity in both the primary and secondary markets. Agile inves tors trade and play the spreads in high yield, they can buy the fulcrum security, provide res cue financing, or if there is a bankruptcy filing, they can fund a DIP [debtor-in-possession] or purchase claims. There are many more entrants into distressed, who have added more liquid ity into the market in the form of alternative financing.”Millernotes that it will be important for inves tors to understand where fund managers are finding their opportunities. The market for special situations and distressed assets has matured over the years, and much more of the activity is hap pening out of court through improvement plans or other solutions. “I think when people think of this space they think bankruptcies, but that can destroy value and the costs can get out of control really quickly,” she says. “It’s always an option, but we really try to avoid going there if we can iden tify other value-maximizing solutions. Distressed investing encompasses much more than just bankruptcies.”FTI’sDelGenio agrees. “There are a lot more financing options, whether those are bridge arrangements, rescue financing or other work outs that are happening outside of court,” he

“There are many companies right now that are hit with supply chain issues, unprecedented container costs and rising commodity costs, during a period of slowing consumer demand,” she says. “That’s just a perfect storm. It can be a great company with a bad balance sheet, pri marily due to things that are completely out of its control. It does not necessarily mean that the company needs to file for bankruptcy protection; it may just need to identify liquidity solutions, or perhaps an equity infusion, to get through this difficultSectorsperiod.”thatshould be riding high are also show ing some cracks. Bob Del Genio, senior managing director and co-leader of the corporate finance and restructuring segment for the New York metro region of FTI Consulting, says that parts of the energy sector are running into trouble even as demand has bounced back. “If you’re looking upstream at things like oil field services, the level of exploration and development in energy has been down for several years. So even though a lot of restructuring has already happened, many companies aren’t seeing the pickup they were expecting,” he explains. “Oil prices can go up, but that doesn’t mean there is profitability or new investment throughout the whole universe of energy companies. That’s one area that might sur prise people given the broader discussion around energy costs.”

He adds that there’s a similar story in healthcare, where segments like senior living that were very popular before the pandemic are under pressure now as firms struggle with staffing and a dip in consumer demand.

Even if the U.S. avoids a deep recession—at least from the perspective of economists—and some factors like inflation or supply chain issues begin to settle, that might not be enough to avoid a dis tressed cycle.

supply chain issue will come back because no one can handicap what’s going to happen with Ukraine or China or any number of issues that could make it difficult to import.”

That math, he says, could keep liquidity tight. If companies have difficulty accessing capital, it becomes harder to avoid restructuring or some other type of turnaround effort.

middlemarketgrowth.org50 Features // Trend Story

“I think we’re at the point where if you’re a company that’s on the edge, and one or two factors come down, it’s not enough to move the needle—there are too many needles,” says SierraConstellation’s Perkins. “If you fix your supply chain issue but you’re still having your margins eaten away by inflation, labor, transporta tion—sure that’s one less thing, but it doesn’t fix everything else. And if you look out over the next handful of months, the data suggests maybe the

VALUE PRESERVATION

to generate the same types of returns. “There is a preference for working with teams that know the options and can get a deal done,” she says.

There are a lot more financing options, whether those are bridge arrangements, rescue financing or other workouts that are happening outside of court.

“The average 1-year forward return for loans at the 500-599bps [basis points] spread range is 8.1%,” the note says. “And the 1-year forward return for high yield is 7.8%.” When spreads are over 600 basis points, forward returns can reach

“If you’re hunting for a one-off deal without the track record, it’s going to be harder to accomplish that when there is already a lot of uncertainty in theThismarket.”shiftcould also lead to new opportunities in the high-yield market. The selloff in high yield bonds has been deep, and investors have been hesitant to return, given recent volatility. But both KKR and OakTree have published research notes in recent weeks highlighting attractive entry points reminiscent of what happened in the first half of 2020. In that instance, investors sold in response to the pandemic, only for the market to rebound significantly.

BOB DEL GENIO Senior Managing Director, FTI Consulting

KKR’s August note echoes some of the trends already discussed here: There are many good companies dealing with suddenly tight liquidity or other circumstances that are out of their control. While those factors may lead to some distress, default risk remains low, in part because of the preference for work-outs. As a result, high-yield spreads are widening and fund managers that are willing to invest could be well positioned to reap higher returns for taking on the risk.

BAILEY M C CANN is a business writer and author based in New York.

says. “Parties generally want to try to do that because then you can move into and out of a process faster and you have a concrete plan that you can tell to the market, to customers, to vendors, versus just going to court and trying to figure it Successfulout.”fund managers in this environment are going to be those that can evaluate companies but also take a view on the entire capital structure and determine which financing tool makes the most sense. Miller adds it’s likely to be a more challenging environment for funds that aren’t dedicated to special situations or distressed. If they just have the option to look for opportuni ties as part of a broader mandate, they’re unlikely

7% for high yield and 10.7% for leveraged loans, the noteSierraConstellation’ssays. Perkins says that, taken together, these factors set up the potential for a distressed cycle that may have legs. “Everyone expects people like me to say, ‘This time it’s differ ent,’” he says. “Is there another rabbit that some one can pull out of a hat and we get more stimulus that slows all of this down? I suppose it’s possible. But I’m not sure there’s an appetite for that. I think it’s too early to say what the opportunity set ends up looking like, but we’re seeing more deal activity than we have been and there’s a lot more uncer tainty.” //

MIDDLE MARKET DEALMAKER // Fall 2022 51

F From left, Twin Brook’s Rich Christensen, Betsy Booth and Timothy Wentink

PHOTOS BY MATTHEW GILSON

Paul Cifelli, a managing director at Kinderhook, says he appreciates having a stable partner where trust is wellentrenched, even in moments of unparalleled catastrophe. “The firm gave us the runway the company needed to see itself through the rough patch,” says Cifelli.

In some spheres of the market, capital is a commodity, but Twin Brook sees its role as more than just providing financing. The team understands the unique needs of spon sors and borrowers in the lower middle market, where it focuses, and it has the track record to prove it.

The past two and a half years have underscored the firm’s commitment to its clients and shown the value of having a trusted lending partner. From the pandemic’s earliest days, Twin Brook supported sponsors and their portfolio companies with immediate liquidity solutions, while providing capital for future growth opportunities.

N

That trust and support paid off, and it ultimately showed the value of having a flexible partner. “Fast forward a year, the company’s EBITDA triples, its free cash flow is vastly improved, and Twin Brook led a dividend recap of the business at the end of 2021,” Cifelli notes. “That is true partnership.”Therelationship between Twin Brook and Kinderhook has spanned at least a dozen transactions and more than one eco nomic cycle. Together, the firms navigated the worst of the pandemic, and they continue to work together to overcome the enduring effects of the crisis and a weakening economy.

Twin Brook’s track record with mid-market sponsors shows why relationships matter

Working within that niche, the Twin Brook team acts as a true partner to its sponsor clients and borrowers, often working with them on more than one engagement.

ot all business relationships are created equal— although their quality isn’t always clear until times get tough. Chicago-based direct lender Twin Brook Capital Partners takes relationships seriously, in both good times and bad.

Team Players

MIDDLE MARKET DEALMAKER // Fall 2022 53Content Provided by ACG Partners and Featured Firms IN Focus TWIN BROOK CAPITAL PARTNERS

Kinderhook Industries, a New York-based private investment firm that manages over $5 billion in committed capital, was among the sponsors that turned to Twin Brook during the pandemic. One of Kinderhook’s companies was in the middle of an operational turnaround when the crisis began. The private equity firm reached out to Twin Brook to ask for breathing room during the jarring market dislo cation. With the lender’s assistance, Kinderhook renego tiated agreements that factored in COVID’s impact on the portfolio company.

Twin Brook has been providing cash flow-based financing solutions for the mid-market since it was founded in 2014. The firm’s borrowers generally have between $3 million and $50 million of EBITDA, although Twin Brook tends to focus on companies with $25 million of EBITDA and below.

When the Market Throws a Curveball, You Need a Lender You Trust

The brunt of COVID-19’s impact on the U.S. economy seems to be in the rearview mirror, although private equity investors and their portfolio companies are still contend ing with lingering challenges, like supply chain snags and inflation.AsKinderhook encourages its companies to hone pricing strategies and strengthen supplier relationships, it’s crucial that the organization have a similar bond with lenders, says

With Twin Brook’s help, the business was able to main tain its M&A momentum. “We also provided substantial

Becoming part of the team also means building mutual trust, something that’s vital during periods of uncertainty when moving quickly is critical.

“We were able to execute the refinancing, so the com pany could acquire both add-on acquisitions prior to the end of the fiscal year,” says Christensen. “Having that existing relationship and precedent documentation in place allowed us to close the credit facility within their exclusivity period.”

Becoming part of the team also means building mutual trust, something that’s vital during periods of uncertainty when moving quickly is critical, adds Rich Christensen, a senior partner at Twin Brook.

RICH CHRISTENSEN, Senior Partner, Twin Brook Capital Partners

“We are the first call when [PE companies] sign up a new transaction,” says Betsy Booth, a managing direc tor at Twin Brook. “We also give them confidence that they can give us a call if there’s a hiccup they’re run ning into.”

He cites an example from November 2021, when a longterm client approached Twin Brook about financing two add-ons for a portfolio company. With a short window for execution—and a previous lender that was unable to deliver—the client asked Christensen and his team to help refinance the existing facility.

“Relationships with our sponsors and borrowers are recurring in nature, because we’re doing multiple deals with the same sponsors,” says Twin Brook’s Timothy Wentink, a partner who focuses on healthcare. “For these size companies, you become part of the team and are able to add a lot of value to sponsors and borrowers by being a good lending partner.”

middlemarketgrowth.org54 Content Provided by ACG Partners and Featured Firms

The Next Inning

debt capacity above the closing credit facility, allowing the company to continue to execute around their acquisi tion growth strategy,” Christensen adds. “The company has since acquired three additional operations during 2022, almost doubling the size of the credit facility since closing.”Asatestament to the strength of Twin Brook’s relation ships, clients tend to come to the firm at the start of a deal, knowing that Twin Brook’s professionals will add value and can provide support if a problem arises.

the COVID-19 shutdowns. During that time, Twin Brook backed financings that assisted the business and allowed for an acquisition that ramped up growth for the company.

“When the economy gets choppy, our lenders take time to understand the issues and what our companies are doing to address challenges,” he says. “Having good lending rela tionships always matters, but they are especially important in the current environment.”

“That’s really a microcosm of all the things that Twin Brook does,” says Grove. “Not only do they stay up to speed on the company, they give us flexibility to make the investments we need to. That is one of the biggest compli ments I could pay to a direct lender.”

Looking ahead, a weakening economy could complicate M&A transactions—by hurting company performance, for example. And although relationships matter when the economy is booming, it’s when things go south that you find out how strong your partnerships are. For a sponsor engaged in M&A, having a returning lender that knows the business and can provide sound guidance for getting a deal to the finish line might be the difference between success andTwinfailure.Brook remains committed to helping clients close their deals, another aspect that keeps private equity firms coming“We’reback.going to work through a solution that works for both sides,” Booth says. “The repeat business and consis tent deal flow we get from sponsors is so important.” //

Louis Aurelio, Kinderhook’s managing director and chief administrative officer.

MIDDLE MARKET DEALMAKER // Fall 2022 55

Another Twin Brook client, Pittsburgh-headquartered Incline Equity Partners, continues to focus on new acquisitions across its focus areas of distribution, light manufacturing and business services. Twin Brook has supported the firm during this time, delivering “certainty of financing” and fast decision-making, notes Cale Grove, a managing director who leads debt capital markets efforts at “TheIncline.nice thing about Twin Brook is they are true busi ness partners for us,” Grove says. “They provide financing, but they also understand our business. They work with us to create a bespoke solution that gives us flexibility to do what we need to support the company and invest in Grovegrowth.”points to a portfolio company that provides outsourced services, which were temporarily impacted by

The Wrap-Up

KEY

ACG EVENTS

MIDDLE MARKET DEALMAKER // Fall 2022 57 586862

Effective deal sourcing strategies in a competitive market.

BACKSTAGE

TAKEAWAYS Highlights from some of the biggest stories in this issue. A RECAP OF RECENT ACG EVENTS AND KEY INSIGHTS FROM THIS EDITION sharedparticipantsSeveral how much LISAtheeventsnetworkingthefacecatchopportunityappreciatedtheythetouponvaluabletimeduringadditionalbuiltintoagenda.CLARKE Senior Managing Director of Exec utive Services, E78 Partners, and ACG Seattle Board President

Summaries of recent live events and a look at of what’s to come.

middlemarketgrowth.org58

ACG BOSTON

ACG Boston DealFest Northeast 2022 hit record attendance on June 7-8 at the Cyclorama and The State Room with 725 attendees.

WRAP-UP

New this year was a Value Creation Forum at Boston Park Plaza Hotel on June 7. The forum was designed for operating partners, private equity-backed company executives and other value creators, and it was held prior to

ACG Events

On June 8, the event continued with DealSource Select for some investment banks, PE firms and other capital providers who partook in a full day of pre-scheduled, 20-minute one-onone meetings.

the beer-tasting event that sold out with 60 attendees.TheWomen’s Connection Reception and Deal Hunters (Young Professionals) Reception were held shortly before DealFest, where New England’s top private equity firms and investment banks shared local brews.

In its eighth year, DealFest Northeast is the largest M&A event in the region, drawing deal makers who came to network and partake in the region’s finest craft beers.

On Aug. 16, ACG hosted its first-ever virtual Operators' Summit, which focused on accelerating value creation. The full-day event featured panel discussions and opportunities for one-on-one meetings, along with invitation-only roundtable dis cussions where private equity operating partners and portfolio executives exchanged best practices.

Held June 16-17 at AC Hotel Raleigh North Hills in Raleigh, North Carolina, the ACG Mid-Atlantic and Carolinas DealSchool drew 32 attendees who learned about the dealmaking process from start to finish with content provided by seasoned pro fessionals in investment banking, private equity, corporate development, accounting and law.

Dealmakers flocked to Sonoma from all over the country and brought their spouses and fam ilies to spend a few more days after the confer ence to enjoy wine country. The event hosted a sommelier in Napa and top winery proprietors to pour wine for the opening VIP reception.

ACG MID-ATLANTIC AND CAROLINAS

ACG HQ

There were 745 registered participants for the event, and more than 140 one-on-one meetings scheduled.Theevent is part of ACG's ongoing effort to serve the full value creation ecosystem, including operating partners and private equity-backed executives.

For the first time in ACG San Francisco’s 30-year-history, ACG M&A West was moved from downtown San Francisco to wine country in Sonoma. Held June 1-2 at Fairmont Sonoma Mission Inn and Spa, ACG M&A West drew more than 200 people.

Panel discussion topics included “The Direction of Cyber Risk Management” and “NFTs in the Business Environment—Today and the Future,” among others.

ACG SAN FRANCISCO

DealSchool was a joint venture between the chapters and networks of the Mid-Atlantic and Carolinas regions, including ACG Charlotte, ACG Piedmont Triad Network, ACG Raleigh Durham, ACG Wilmington Network, ACG Richmond, ACG 757 Network, ACG Maryland and ACG National Capital.

Five panel discussions explored drivers of value creation in the current market, how PE-backed executives can be successful, ways to prepare portfolio companies for growth, outsourcing strategies that support value creation, and key indicators for tracking portfolio performance.

The attendees not only came away with a great appreciation of all that goes into dealmaking, but they broadened their personal networks and spent time with their fellow attendees as well as the panelists and instructors.

MIDDLE MARKET DEALMAKER // Fall 2022 59

This year, the event welcomed family offices, limited partners, independent sponsors and cor porate strategic acquirers, along with the senior investment bankers, lenders and fund managers.

middlemarketgrowth.org60 The Wrap-Up // ACG Events

Held over two days in late July, the conference had about 100 attendees who partook in catama ran rides, beach parties and clam bakes.

On July 28, dealmakers spent more time in one-on-one meetings before breaking at a beachside barbecue luncheon. Some dealmakers stopped by the Ascension Invitational Launch Party at Surf Lodge with a special performance by The Chainsmokers.

ACG NEW YORK

The ACG New York Summer Dealmaking Conference at Gurneys Star lsland Resort and Marina in Montauk, New York, is a summer event specially created for dealmaking professionals, offering intimate and unique networking oppor tunities in conjunction with high-quality, relevant one-on-one deal meetings.

On July 27, dealmakers started off with a breakfast at Showfish restaurant before two hours of one-on-one meetings. Later in the day, they took a catamaran ride, and attended a reception and a VIP Dealmakers Invitational Dinner.

ACG SEATTLE

With more than 475 attendees representing about 160 companies, the awards gala highlighted the most impressive deals and dealmakers, investors and cor porate leaders.

Attendees enjoyed the stunning views of the Puget Sound from the 17th floor of the Russell Investment Building as they listened to two panel sessions, titled “M&A Financing and Market Update” and “In the Trenches—Women Deal Makers.”

The Corporate Growth Awards are presented to the executives, companies and deal teams that were individually selected by the chapter’s awards commit tee from a long list of nominations.

• NOVEMBER 4: Annual Economic Forecast – ACG St. Louis

• NOVEMBER 3: 8th Annual Healthcare Conference – ACG Connecticut

• NOVEMBER 1-3: Florida Capital Connection –ACG Florida Chapters

• NOVEMBER 9-10: 9th Annual Deal Crawl –ACG Charlotte

• OCTOBER 17-18: M&A East 2022 – ACG Philadelphia

Categories included Deal of the Year, Deal Team of the Year, Emerging Growth Company Award (Under $25 million), Corporate Growth Company Award and Special Service Project Award.

• DECEMBER 14: NextGen Lunch –ACG Orange County

• NOVEMBER 8-9: ACG LA Business Conference – ACG Los Angeles

On June 8, ACG National Capital celebrated the region’s leading executives and businesses at the 20th Annual Corporate Growth Awards Gala at the RitzCarlton in McLean, Virginia.

ACG NATIONAL CAPITAL

ACGUpcomingEvents

• NOVEMBER 14-15: DealSource North and ACG TorontoConnectionCapital–ACG

• OCTOBER 6: AgTech Investor Symposium –ACG Raleigh Durham

The keynote lunch featured Ben Saunders, a record-breaking polar explorer, who is also a threetime main stage TED speaker and a TED Master Storyteller. He’s featured in TED Talks: The Official Guide to Public Speaking.

• NOVEMBER 7-11: Middle Market Week –ACG New York

After the panels, attendees spent two hours net working before dining at the Dealmakers Dinner at The Capital Grille.

ACG Seattle hosted its premier event, the Northwest Middle Market Growth Conference 2022 on July 14 with 230 dealmakers who gathered at the Fairmont Olympic Hotel in Seattle for a day of networking with the dealmaking community.

• OCTOBER 27: Wine Tasting 2022 – ACG Orange County

Effective Deal Sourcing Strategies in a Competitive Market

Sponsored by Panel hosted by

middlemarketgrowth.org62 Content Provided by ACG Partners and Featured Firms

From LinkedIn to AI to old-fashioned phone calls, private equity firms and investment banks discuss their approach to finding quality targets

MIDDLE MARKET DEALMAKER // Fall 2022 63

DON RITUCCI (OPPENHEIMER):

JIM M C VEIGH (CYNDX): When you look back to 2020 when the pandemic first started, a lot of people who were considering buying Cyndx’s services were saying, “I have to hold off a little bit. I don’t know where things are going to go.” Now, we are seeing an explosion in sales. People are saying, “I need this service now. How do I get it?” They want a global perspective and real-time information, and they want tools that can help them cut through the clutter to better assess the market opportunity and identify the leading companies in any particular space. Bottom line, it’s very active for us, as firms are trying to be very selective and work with the right companies across their fund strategies.

probably as robust as we’ve seen. We haven’t seen recession fears and rising interest rates from an M&A perspective yet. On the life science side, we’re active too, but for a different reason. We spend a lot of time in biotech. Biotech is notoriously starved for capital, and private companies tap into the public markets through IPOs. That is com pletely shuttered. The valuations have been depressed in biotech for roughly a quarter now. Since the IPO market’s not open, we’re seeing a pick-up in reverse mergers. So private companies that need capital and a listing are merging into public company shells.

For these reasons, in July the Association of Corporate Growth convened a roundtable, sponsored by Cyndx, to discuss how private equity firms and investment banks are sourcing deals more efficiently than ever and achieving success in today’s uber competitive dealmaking environment.

Content Provided by ACG Partners and Featured Firms

JASON CUNNINGHAM (ARGOSY PRIVATE EQUITY): The market is still very competitive for attractive assets. We’ve taken more books this year than we did over the same period last year. With the volume of oppor tunities we have reviewed, the biggest challenge has been sifting through them to find the right deals quickly. We can’t run hard at every deal that we review, so to Rich’s point, it’s about finding the situations where we feel like we have an angle. Are we going to be advantaged in this situation relative to others? Is this an industry where we feel like we have some angle to grow the business and create value more effectively than another bidder? Do we have a good relationship with the advisor to the company? All these things are critical in the way that we think about what deals we’re going to spend time on.

WILL DAVIS (RIVERSIDE COMPANY): We’ve been very active this year. On a day-to-day basis, it’s very similar in terms of number of deals presented to us compared to prior years, especially down in the smaller end of the market. But we haven’t taken as many books because we are disciplined about focusing our time on those situations where we have conviction as a result of our spe cialization. It’s a quality issue this year. A lot of A-plus assets were coming to market last year, and some that were less attractive didn’t get attention. They are not bad businesses, but they aren’t generating the same kind of enthusiasm as last year.

How do you characterize the dealmaking environment right now?

well-aware of your experience and your capabilities, which means staying in touch, following up and staying close to the seller—so when the seller is ready to come to market, they know you are ready as well.

DANIELLE FUGAZY (moderator):

RICH GRANT (NORTHLANE CAPITAL): The current environ ment is requiring attention to detail because there are fewer quality assets compared to this time last year. You have to go hard for assets you like. This dealmaking environment requires strong relationships across all facets. You want the target companies to be

Finding and acquiring the ideal target at exactly the right price is every private equity executive’s goal. However, the perfect deal is elusive. Successful private equity firms and investment banks are looking at unique ways to source quality deals quicker in hopes of yielding optimal returns upon exit. As a result, the role of the business development officer at private equity firms has continued to grow and evolve.

From a healthcare M&A perspective, the market is very active. On the healthcare services side, the activity is

Backstage

WILL DAVIS is a senior originator at the Riverside Company, a lower middle-market private equity firm. Riverside employs about 350 people across four continents and nine different fund strategies. Davis works across all the different fund strategies finding new opportunities. The firm has $14 billion under management.

middlemarketgrowth.org64 The Wrap-Up // Backstage Content Provided by ACG Partners and Featured Firms

RICH GRANT is director of business development for Northlane Capital Partners. The Maryland-based firm is interested in deals with enterprise values of $50 million to $300 million with a minimum EBITDA of $5 million.

CUNNINGHAMJASON

JIM M C VEIGH is the founder of Cyndx and CDX Advisors. CDX Advisors is a full-service broker-dealer that focuses on high-quality growth companies in the global digital economy. Cyndx is a truly dynamic, unsupervised, AI-driven search and discovery solution for dealmakers, investors, fundraisers and corporate development professionals that provides real-time predictions and trends for dealmakers. Cyndx uses AI to curate targeted private companies in all sectors and has information on more than 21 million companies globally. As a banker, McVeigh saw the need to develop high-value algorithms, which provide more relevant, accurate real-time intelligence than is possible with legacy solutions, and as a result founded Cyndx.

ArgosyDevelopment,BusinessPrivate Equity

JIM MC VEIGH Founder, Cyndx DON RITUCCI Head of Healthcare M&A, Oppenheimer

About Participantsthe

DON RITUCCI leads the healthcare M&A group at Oppenheimer, a full-service international investment bank. The healthcare group is based in New York and touts about 35 professionals. Over the past year, the firm’s M&A deal sizes ranged from $30 million to $1.1 billion, with most under $500 million.

WILL DAVIS Regional RiversideOrigination,Director,TheCompany

DANIELLE FUGAZY Moderator, Contributing Editor, ACG

RICH GRANT Director, PartnersNorthlaneDevelopment,BusinessCapital

JASON CUNNINGHAM is head of business development for Argosy Private Equity. Argosy is a Wayne, Pennsylvania-based lower middle-market private equity firm. The firm primarily invests in family, founder- or entrepreneur-led businesses with $3 million to $10 million of EBITDA, and between $10 million and $100 million of revenue. Argosy is currently investing out of its sixth private equity fund, which had a final close in July 2022 with $422 million.

MIDDLE MARKET DEALMAKER // Fall 2022 65Content Provided by ACG Partners and Featured Firms

GRANT: It’s managing my time. There are quality relationships, but the best relationships might not necessarily be the most prolific relationships. Identifying the best deals based on my deal team’s interest is very important to me. While I want to see everything out there, I admit my ears perk up when I hear about deals in certain subsectors because of our ongoing interest in certain subsectors. It’s really about where we spend our time to identify the best deal sources and make sure that the proper people inside of our firm are well-connected with those relationships—even if they’re not showing us 1,000 deals, but they are showing us quality deals that best fit our thesis.

FUGAZY: What are the biggest challenges you face when you look for quality deal flow?

RITUCCI: We actually have a dedi cated business development person now. She is the mirror of a PE business development professional. She’s calling primarily on founder-owned compa nies. One of the challenges is: How do you identify private companies? Once you identify them, how do you make sure you have the right contact and contact information? Even if you jump through those hoops, you still don’t know if the timing is right. Are they looking to raise capital? Are they think ing about M&A? Maybe they’re not thinking about any transaction at all. It comes back to our time as well. Here’s an example: We found a com pany in the home health space. It was a skilled home health business that was growing. The founder was all over the map in terms of what he wanted. When we first talked to him, he wanted a minority investment, then it changed to an outright sale and then he wanted an ESOP (employee stock ownership plan) for his employees. In the end he did a very small leverage recap. Obviously that’s not a conversation that we had over a couple of days. That’s a conversation we had over four months. The time spent can be challenging.

MCVEIGH: A lot of the smaller firms don’t have the resources to spend 100 hours building contacts and relation ships. The fact that our tools help our clients identify opportunities well in advance of when they will happen allows them to selectively engage, save time and money, and increase their probability of success.

DAVIS: You want to be front of mind for intermediaries that align with your mandate. Various technology tools help you do that. There is an art to it.

MCVEIGH: Time is so important and building relationships is critical given how competitive the PE market is. The first part of the conversation is, I’m interested in your industry so you should talk to me about it. The next part of it is, I will call you on a regular frequency with something intelligent that’s going on in your industry so that you become a valuable source of infor mation; increasingly, my target cus tomer will begin to rely on the things

DAVIS: Some of these processes are very crowded and on very tight timeframes. If we get to that point, we have to move quickly. At Riverside, our scale helps us move swiftly, as we can allocate additional people to work in parallel. That bandwidth is great. But we are also using all sorts of tools that help us shave time or touch more people in a short period of time, which is advantageous.

DAVIS: We’re the same way. We narrow stuff down. We have industry experts that are zeroing in on certain spots. We try to get it as quickly as we can. We don’t want to be kicking tires or wasting anybody’s time.

CUNNINGHAM: I agree with Rich, the biggest challenge is cultivating and maintaining relationships with a limited amount of time. As a recover ing investment banker, I feel like I have a unique perspective from spending most of my career on the other side of the table from private equity sponsors. The private equity firms who were top of mind as potential investors were the groups that I had recently met with or spoken to, whether they had stopped by the office, set up a call or I’d run into them at a conference. That was 15 years ago. Today, the universe of inter mediaries and trusted advisors has expanded so much that there’s just not enough time in the day to cover all the intermediaries that way. That said, we still have to find ways to cover these firms—even if they are just showing us a couple of deals a year—to make sure we are top of mind. That is a real challenge. We are now doing some of that through creating content that we push out through email or finding other ways to communicate with all of our potential deal sources regularly

GRANT: The mindfulness of time isn’t just internally. It is mindfulness of Don (Ritucci)’s time and his peers in banking. They want to share some thing with us because they believe that it fits what they have consistently seen from us. If we are moving off of that or if we have a different take on it for the current market, we make sure to articulate that quickly and not take up a spot in a process because we are curious.

without being overbearing. We want to stay top of mind so that advisors are thinking about Argosy as one of their potential calls when it is time to launch a deal. We have been very focused on leveraging our CRM (customer relationship management) system, website and other tools that we have available to us to be more efficient because we just don’t have the time to talk to everyone we’d like to.

RITUCCI: We’ve ramped up on the LinkedIn side. We are also using Pitchbook, Zoom Info and SourceScrub. Ultimately, our BD per son has a list of companies she’s trying to get contact information for. If we’re going out wide on something, getting the list is difficult because people turn over constantly. I told my team: Do not send me the list until someone has

MCVEIGH: If you’re not (using tech nology), you won’t remain competitive over the long term. The market has become too competitive. We believe technology is critical for identifying and sourcing opportunities, due dili gence, and helping grow investments after they have been completed. It’s not only a matter of telling you who to go to, but how to get there. We’ve integrated tools like LinkedIn, so people can see who they know or may have someone in common with before they reach out, and valuation tools, so

people know what to pay. It’s all about adding value across every step of the deal life cycle.

around for 32 years, and along the way we have made 125-plus platform investments and have reviewed a lot of deals to get there, so we have built a pretty robust data set that we can utilize to help us figure out where we should be spending time to maximize our probability of success. Technology and data help us support our decisionmaking process.

RITUCCI: Back in the day when we launched an auction process, we would call our relationships at the private equity firms and give them a heads-up. And they’d say, “Send the NDA (nondisclosure agreement) over.” When I started doing this, there may have been 50 private equity funds that invest in healthcare. Now, there

GRANT: We are using technology right now with our deal sourc ing—everything from tracking our interactions to getting insights into industries to getting insights into the board of directors. There’s a couple of different tools we use. We look at who has traded what asset in what space, and what our interactions look like with that banker or intermediary. It helps me figure out where to spend my time. When I talk to an investment banker, I can say with some accuracy the last time we had interaction, and know what they have been working on and what they may be looking for.

gone through each and every contact, which is a bit of an onerous task.

value to their fund. Most PE firms have enough opportunities coming over their transom; it’s about identifying the best opportunities, understanding their competitive advantages, and adding value.

FUGAZY: Does anyone use tech nology to source deals?

As a BD leader, I have to be on top of that.

Most PE firms have enough opportunities coming over their transom; it’s about identifying the best opportunities, understanding their competitive advantages, and adding value.

middlemarketgrowth.org66 The Wrap-Up // Backstage Content Provided by ACG Partners and Featured Firms

that I’m providing to them. The last part of it is getting you in front of com panies across an industry. At Cyndx, we developed a tool that enables our customers to identify companies that will likely need capital within the next six months. They haven’t told you that, but we know with 86% certainty that that is the case. That’s powerful. We can show you every deal that company has done and who the intermediary was, so that when you’re reaching out to that company, you know their exact history and you’re not wasting time. Dealmakers don’t want to be busy. They want to be focused on companies that are going to bring

JIM MCVEIGH, Founder, Cyndx

CUNNINGHAM: Technology has begun to level the playing field. But I look at it in two buckets. There are efficiency tools, and there are data and analytics tools. They both have their place in what we’re doing. The efficiency tools allow us to do things more effectively and faster. The data and analytics tools provide insight and intelligence, for example, into where our best deals come from, the intermediaries we should be covering, and who we should be building deeper relationships with. Argosy has been

DAVIS: Since we have both a struc tured equity team and a special situations team, screening calls are very helpful, as they are often complex and dynamic situations that wouldn’t appear in a teaser. There’s more of a story to it, so they say, “I just sent you a teaser, the story wouldn’t come through. Let’s have a conversation, there are some things I want to walk you through that are not obvious, but I think will be interesting.” I love getting those calls because you get to peel back a couple layers of the onion. But part of the reason why we get those calls is because we’ve done some of those things we’ve talked about, like kept up the social media presence, communicated what we are looking for and stayed in touch.

On the buyer’s side, people are tracking deals way in advance. You have to get in front of that company so that you can establish that relation ship, so they don’t go to a process and don’t know you. It’s a lot more work in terms of identifying the companies and establishing relationships, but you’re going to be in a much better place, and you’re going to get better terms if you have done that work ahead of time. //

MIDDLE MARKET DEALMAKER // Fall 2022 67Content Provided by ACG Partners and Featured Firms

GRANT: I get those calls and some times it’s just simple screeners. They want us to know they are preparing to bring something to market, and they ask if we think it fits our mandate because they don’t know for certain based on past interactions or current literature. But coming full circle, every thing gets tracked as an interaction and touch point. Even that banker calling is a valuable touch point that I track.

CUNNINGHAM: I recently had a banker tell me for a sponsor-backed deal, by the time the book hits your desk, you’re already behind in that pro cess because there are groups tracking that deal that have conviction in this space, that have been watching it and are ready to move. You’re going to be behind the eight ball.

We should be paying attention to that. We can probably predict when it will be coming back around depending on who that buyer was.

GRANT: There’s probably enhanced benefits in some of these tools. If you were to look at our CRM and the way that we process the things that are passes for us, especially when they’re a pass from a size perspective, we know that they’re going to mature.

DAVIS: These tools are clearly adding efficiency, but they’re not going to replace the bankers and trusted relationships we’ve built over the years. They can supplement some of the things we’re doing to make us a little bit sharper, including things like target identification and acceleration of research.

FUGAZY: Are technology, data analytics and AI the future for finding the best deals?

RITUCCI: It’s funny you say that. If we are sending 100 books out, we’re tracking PE activity as well. We track things like: Did they reach out to us to demonstrate how interested they are? Did they even check in with us to learn the background? Sometimes it’s hard to differentiate, so we’re looking for indications of interest as well.

CUNNINGHAM: I do love to get that phone call, though I have to admit, I do get a little nervous these days when the phone’s ringing instead of the ding of an emailed teaser. In all seriousness, though, that’s where the relationship element of deal sourcing comes in. If Don (Ritucci) or Jim (McVeigh) has time to make 20 calls on a deal that he’s shopping to 200 people, I want to be one of those phone calls to hear the story.

are thousands. It’s very rare that we’re going to call anyone. It’s not a blast email; it’s an individual email, but it’s not with a call. Do bankers ever call you anymore?

MCVEIGH: Technology will never replace what the people in this room do. Data is not going to really help you get conviction around a deal or nego tiate final terms, but it can help you frame everything you do. We can help you understand what’s going on, on a global basis, that could impact that investment you’re about to make. It’s important to know things that are hap pening outside of the core area that will impact you. Maybe you weren’t thinking about it at the time, but all of a sudden, Google launches a new product that is going to impact you. You need to be aware of things outside of the sphere that you’re investing in and how that impacts it.

Additionally, there’s only so much capacity that any one human has. I do too many demos with people where we say, “Give us your best sector.” And we’ll wind up showing them five or six companies they’ve never heard of and they wish they had.

CUNNINGHAM: I think that’s right. This will always be a relationship business, but technology tools and data are going to be important—even as a tool to determine what relation ships to invest in. For example, even something as simple as looking at the data that went into our CRM over the last 24 months and saying, “Here’s a list of bankers that we saw deals from and here’s how far we went in their processes” can provide insight. We can see what kind of success we’re having with whom and then make decisions. For example, should we be spending time with this firm because we get a lot of deals from them? Or with this other firm that we only see a few from, but most are a good fit?

An ongoing challenge related to environmental, social and governance strategies in the middle market is the temptation to apply metrics intended for large companies. That can prevent a meaningful application of ESG standards and instead become a “check the box” exercise, something that an indus try consortium of LPs and GPs, known as the Data Convergence Project, aims to remedy. “How ESG Is Changing the M&A Landscape,” p. 40.

“Despite Recession, Lenders Want to Put Money to Work,” p. 38.

A LESSER RECESSION

Key

COAST WITH THE MOST DealMaker’s Q2 fundraising report shows that most of the funds raised in the second quarter of 2022 came from well-entrenched East Coast investors. Six of the 11 funds highlighted were raised by wellknown firms on the East Coast that are returning for consecutive funds. Several notable firms on the West Coast made the list too, along with two from St. Louis and Denver. “East Coast Firms Dominate Q2 Capital Collection,” p. 20.

The economic backdrop today differs markedly from the Great Recession, and strong middlemarket and lower mid-market companies will continue to have access to financing, argues the CEO of lender WhiteHorse. Significant longterm committed capital in the direct lending market, more intense credit scrutiny and robust employment should give borrowers comfort that this downturn won’t look much like 2007-2009.

SIZING UP ESG

Introducing ancillary services can provide addi tional revenue streams for physician practice groups and improve the patient experience. But before adding new services, consider whether they fit into the practice’s clinical workflow, how accessible the service is to patients without your offering, whether you have the resources to make it successful, and your ability to adhere to with necessary compliance, billing and coding requirements. “Scaling Physician Practices to Increase Value,” p. 14.

CATCH UP QUICK: From a burgeoning market for pedestrian safety technology to missteps in ESG, here are some of the highlights from this edition of DealMaker.

SEEKING SAFE PASSAGE

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EXTRA, EXTRA!

TAKEAWAYS

Data from the U.S. National Highway Traffic Safety Administration shows that traffic deaths reached a 20-year high in Q1 2022, with a 7% increase in fatalities compared with the same period in 2021. Awareness of the dangers on the road is helping to fuel the market for new technology aimed at improving pedestrian safety, and innovative businesses in the space are drawing investors’ attention. “Giving the Green Light to Traffic and Pedestrian Safety Innovation,” p. 30.

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