Middle Market DealMaker // Fall 2023

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ANASTASIA DONDE Senior Editor, Middle Market Growth adonde@acg.org

Behind the Numbers

Whenever someone wants to make a point or prove a thesis, the quickest way to do it is with data. In this magazine edition, we offer a midyear update based heavily on data and research from several providers—including ACG’s own GF Data—to take the temperature of the market.

There is no doubt that the numbers look discouraging. Amid market headwinds, bank collapses, rising interest rates and geopolitical conflicts, private equity M&A has once again moved to the sidelines to wait for a better investment climate. Some of the data shows what we already suspected: Deal volume and leverage is going down while dry powder is increasing among private equity, private debt and other strategies.

At the same time, we know numbers don’t always tell the whole story, and there are some hopeful signs. Average valuation multiples haven’t dropped by much, for example, suggesting that deals for quality companies are still closing. GF Data’s numbers show a rebound in transactions in the first quarter of this year, compared to the fourth quarter of 2022, suggesting that deals for smaller companies are still crossing the finish line. (GF Data’s reports track deals in the $10 million to $500 million enterprise value range.)

Marc Chase, a partner and private equity leader at Baker Tilly, compared the current environment to a barbell when he spoke to Middle Market DealMaker for our deep dive into private equity dry powder on p. 16. “We see really high-quality, class A deals getting done, and we see the lower end of the market where deals need a lot more TLC. What we’re not seeing is that middle tier,” he says. The cover story and trend feature, meanwhile, explore deal volume, valuations and leverage numbers so far this year, as well as creative strategies investors are using to bridge the gap between buyer and seller expectations. Multiple industry experts suggest the second half of the year will be a better dealmaking market. They feel the bank collapses in the spring delayed a recovery by making debt capital even harder to come by. Our sources say that conditions must either stabilize or dealmakers will have to learn to transact in a different environment, with higher interest rates, lower leverage and more uncertainty.

Whichever path the market takes, we look forward to digging into third and fourth quarter numbers and determining whether these predictions came true. //

MIDDLE MARKET DEALMAKER // FALL 2023 EDITION

VICE PRESIDENT, ACG MEDIA

Jackie D’Antonio jdantonio@acg.org

CONTENT DIRECTOR

Kathryn Maloney kmaloney@acg.org

SENIOR EDITOR Anastasia Donde adonde@acg.org

DIGITAL EDITOR Carolyn Vallejo cvallejo@acg.org

ART DIRECTOR, ACG MEDIA

Michelle Bruno mbruno@acg.org

CHIEF REVENUE OFFICER

Harry Nikpour hnikpour@acg.org

SENIOR DIRECTOR, STRATEGIC DEVELOPMENT

Kaitlyn Gregorio kgregorio@acg.org

Dealmakers are expressing cautious optimism about M&A activity in the latter half of 2023. Buyers and sellers alike are showing a penchant for creativity to close deals, whether through greater equity contributions or use of earnouts and other deal terms.

At a time when traditional equity and debt capital are difficult to access, Middle Market DealMaker explores a range of strategies that PE investors are using to provide capital to companies or extend the life of their funds.

Association for Corporate Growth membership@acg.org www.acg.org

Copyright 2023 Middle Market Growth® and Association for Corporate Growth, Inc.® All rights reserved.

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Trend Watch

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

8

DEAL ROUNDUP

A look at investment opportunities tied to water conservation and management.

12

IN PERSPECTIVE: PRIVATE EQUITY

A partner at Ridgemont Equity outlines the themes fueling investor interest in the environmental, power and infrastructure services subsector.

14 20

IN PERSPECTIVE: INVESTMENT BANKING

The CEO of Alantra U.S. points to the areas of M&A that stand to benefit from the use of data analytics and artificial intelligence.

16

FOCUS ON FUNDRAISING

Today's challenging macroeconomic environment has PE firms thinking carefully about how and when to invest their dry powder.

ON THE MOVE

Recent hires and promotions among middlemarket investors and advisors.

Water Utilities Investors Take On Climate Change

Investors bet on water companies to solve for multiple issues, including water scarcity, global warming and aging infrastructure

BY ANASTASIA DONDE

Water shortages in cities across the U.S., shrinking lakes and rivers, and unpredictable weather patterns have shined a spotlight on water scarcity and preservation. In response to these challenges, deals in the water utilities sector have been increasing.

Although activity is light this year—in line with the rest of the M&A market—water specialists say the opportunity set is vast and will continue to pick up because of long-term trends affecting the sector that include water scarcity, climate change, aging infrastructure, increasing regulation and population growth.

“There are long-term, attractive secular trends around water management and treatment,” says Michael Oleshansky, managing director at investment firm PSP Capital Partners, which owns a company focused on stormwater management.

The deals moving forward today usually involve high-quality companies that offer a unique product or service, smaller businesses that don’t require much debt financing, or strategic deals funded with cash and stock. In fact, strategics have been especially competitive in the water utilities arena for some time, representing about 80% of M&A activity in the sector for the past three

years, according to investment bank Raymond James.

For their part, private equity firms are primarily seeking high-quality, premium assets when acquiring new platforms. “A company that is a market leader, has a proprietary technology or product, operates in a fragmented industry ripe for consolidation or has demonstrated strong revenue/margin growth is more likely to trade at frothier multiples,” says Brendan Tierney, managing director and head of Global Water at Raymond James.

Water-focused bankers at Baird say that the market is being selective, but interest remains strong for highquality companies. “Amidst a softer, more uncertain market, buyers are picking their spots, while some see a window to do something transformational,” says John Kinsella, director in Baird’s Water & Filtration group.

The Strategic Advantage

Advisors say strategics are in an advantaged position for deals in the water utilities sector, given healthy balance sheets and the ability to buy companies with stock and cash. They are also paying top dollar for quality assets. “When a premium water asset becomes available, we’ve seen strong competition, and companies will step up and pay a compelling price,” says Steve Guy, managing director and global head of Water & Filtration at Baird.

In a strategic deal in May, Xylem, a publicly traded water technology company, acquired Evoqua, a provider of water and wastewater treatment systems, for $7.5 billion and a high valuation of 25x EBITDA. In an announcement about the deal, Xylem President and CEO Patrick Decker noted, “Global awareness of water as a systemic risk to society has never been greater. Investment in water solutions continues to accelerate as

communities and businesses around the world address intensifying challenges like water scarcity, quality and resilience to climate change.”

Several other strategic water deals, including Whirlpool buying InSinkErator, Pentair acquiring Manitowoc and Zurn Water Solutions purchasing Elkay, came in at multiples in the mid to high teens in 2022.

Still, M&A volume in water has cooled off lately because sellers are unable to get the same transaction multiples that they saw just 12 months ago, largely due to macroeconomic headwinds.

“Part of the reason for lower transaction volume is fewer exits from financial sponsors who don’t think they will get a strong multiple in the current market, but for strategics with great balance sheets, there is room to make acquisitions,” says Guy. “But the business has to be performing well to withstand the scrutiny of the market,” he says, adding that the lesser quality companies or companies with lower quality earnings aren’t being marketed right now.

Adding On

Although debt financing is hard to come by, private equity firms are still competitive in smaller deals and add-ons, with many having acquired

platforms in the water utilities sector that they’ve been using to tack on smaller businesses.

Valuation multiples in the water industry tend to vary greatly depending on the type of business, but platforms can expect to trade for 10x-15x EBITDA, while small add-ons can go for 4x-8x EBITDA, according to Raymond James’ Tierney. “Like most industries, multiples are largely driven by the size and uniqueness of the asset, as well as its financial characteristics,” Tierney adds.

In May 2021, New Mountain Capital bought Aegion Corp. in a take-private deal valued at $1.1 billion, or $30 per share, and has since completed several add-ons. New Mountain had been looking at the St. Louis-based company for years and saw an opportunity to focus it on water and shed some of its unrelated assets.

Some of the old infrastructure in water pipes will continue to need upgrades, so New Mountain saw a long-dated opportunity in Aegion, which provides infrastructure maintenance, rehabilitation and protection solutions. “There are estimates that it could take up to 100 years to fix leaks in pipes,” says Joe Delgado, managing director at New Mountain. Currently, it is estimated that about 30% of water is lost in the pipes. “It’s incredibly economic to get things right,” he says.

Following New Mountain’s acquisition, Aegion divested an energy services division and completed five add-on acquisitions, including underground excavation company Next Level Environmental and trenchless rehabilitation provider Infraspec Services.

Another company actively pursuing add-ons is Komline-Sanderson, a designer and manufacturer of equipment and aftermarket solutions for water treatment, liquids filtration, and separation and air pollution control, backed by private

There are long-term attractive secular trends around water management and treatment.

MICHAEL OLESHANSKY Managing Director, PSP Capital Partners

EV/EBITDA BY ACQUIRER

for water treatment, StormTrap’s services become more attractive. The company’s executives are working with government associations and water-management nonprofits to target progressive and practical regulation for stormwater management in an environmentally friendly way, notes Don Traubert, director at PSP Capital.

family investment firm Sunny River Management. Komline has made six purchases since Sunny River bought the New Jersey-based company in 2021. Most recently, Komline acquired Wyssmont Co., a designer and manufacturer of equipment for product filtration, thermal processing, wastewater management and other industrial applications in June 2022.

Fausto Lucero, principal at Sunny River, says the firm generally employs a buy-and-build strategy. Komline’s management was looking to grow through acquisitions, so the shared goals made sense for the deal. The company was already growing and has quadrupled in size since its acquisition by Sunny River.

Federal laws have been a further boon to growth in the water utilities sector. The America’s Water Infrastructure Act of 2018, for example, provides for water infrastructure improvements throughout the U.S., while the $1.2 trillion Infrastructure Investment and Jobs Act of 2021 earmarked funds to expand access to clean drinking water for households, businesses and schools. The latter

includes provisions for replacing lead pipes and addressing contaminants like the so-called forever chemicals known as PFAS in drinking water, among other priorities. Ultimately, the 2021 bill “creates an estimated $60 billion opportunity for upgrading water infrastructure,” says Lucero.

New Solutions

The modern challenges to water management require innovative solutions, which increasingly are drawing the interest of investors.

When PSP Capital acquired StormTrap, a Romeoville, Illinoisbased provider of solutions for managing water runoff during storms, in 2022, the firm’s executives felt the business model was attractive and offered opportunities for expansion. The company’s solutions allow property owners to manage and treat stormwater themselves, says PSP Capital’s Oleshansky. “The rising frequency of extreme weather events and legacy stormwater infrastructure deficiencies mean new solutions are needed,” he adds.

With rising population density in some areas and a growing need

PSP Capital found StormTrap in collaboration with its real estate arm, Pritzker Realty Group, which owned a property that was a StormTrap customer. (PSP runs buyout, venture capital, real estate and asset management strategies.) Thanks to perspectives provided by its real estate affiliate, PSP can see trends in population growth and density in urban areas that require new water solutions. One of the things they noticed is “antiquated infrastructure in many areas of the country that creates a great burden” on water supply, says Oleshansky.

Over at Aegion, the business backed by New Mountain Capital, the team is developing new technology solutions to make its work easier, such as using artificial intelligence and robotics to find and fix leaks and predict when the infrastructure will need upgrades.

“There is an opportunity to become a technology leader and provide sensing capabilities,” Delgado says. “We’ve made a significant investment in robotics, sensing technology and analytics in the field.”

The company’s technological expansion had been largely organic, while add-ons are still a pursuit for other purposes. “We’re looking for several things: First is a great team with the right winning culture, a leadership position in a category, a product or capability that we don’t have, or geographical expansion,” Delgado says. //

ANASTASIA DONDE is Middle Market Growth’s senior editor.

Data by Raymond James

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The Interconnected Ecosystem of Environmental, Power and Infrastructure Services

Multi-decade themes create an attractive investment backdrop

The interconnected ecosystem surrounding power generation and delivery, natural resources and the environment, and water, waste and other infrastructure has seen significant disruption in recent years. Companies operating in the environmental, power and infrastructure services subsector are being impacted by several longterm trends that have created a dynamic backdrop across this ecosystem:

• Aging infrastructure that requires significant ongoing investment

• Evolving power generation sources with the expansion of renewables

• Increasing electrification of society and reliance on last-mile infrastructure

• Rising awareness of the need to find more sustainable practices across industries Identifying differentiated business models that are propelled by these trends presents a compelling opportunity for investors to partner with value-added solutions providers.

BY RYAN JACK, PARTNER, RIDGEMONT EQUITY PARTNERS

Ridgemont Equity Partners has built a thesis-driven investing effort in the environmental, power and infrastructure services subsector. Two relevant investments are Sparus Holdings and Northstar Recycling. Sparus is a provider of field-based and professional services for utility and infrastructure markets, while Northstar is an assetlight provider of sustainability-oriented managed waste and recycling solutions to food, consumer packaged goods and other industrial clients.

Ridgemont and its portfolio company management teams have identified several critical themes that will continue to drive business activity and evolution in the environmental, power and infrastructure services subsector:

Aging Mission-Critical Infrastructure with Increasing Strain

The American Society of Civil Engineers recently published a Report Card for America’s Infrastructure that graded the existing installed base of U.S. infrastructure a C-minus overall. Beyond the in-place infrastructure receiving a below-average grade, critical U.S. infrastructure is also aging rapidly and is increasingly strained by population growth and migration and evolving business practices. Over time, maintaining America’s infrastructure will require additional investment, and this backdrop creates opportunities.

For example, the U.S. power supply is evolving rapidly with renewables taking share from traditional fossil fuels and power generation becoming more distributed. Meanwhile, society is becoming increasingly electrified, and consistent and reliable electricity has become more critical. Yesterday’s power grid cannot accommodate all these changes. Service providers that upgrade, inspect, test, maintain and repair infrastructure will play an increasing role in reducing the strain on aging infrastructure and enabling the ongoing transition in power generation and delivery.

Similarly, landfills have long been the traditional disposal location of America’s waste. But landfill capacity is limited and will continue to be constrained due to regulation, permitting limitations and environmental concerns. This shifting landscape creates opportunities for innovative companies to provide differentiated waste reduction, recovered material reuse and recycling solutions.

Increasingly Complex Regulatory and Compliance Requirements

Laws and regulations impacting the environmental, power and infrastructure services ecosystem continue to expand in scope and complexity. At the same time, the economic and reputational cost of infrastructure failure or other noncompliance is rising. Today’s asset owners and operators must adhere to ever-growing compliance requirements, while still focusing on their core competencies in running their operations. To do so more effectively, many of these entities are turning to outsourced service providers that can deliver critical services with specialized expertise.

For example, as commerce and daily life increasingly rely on consistent electricity supply, and pressures to the electric grid mount from general infrastructure aging, disruptive weather events and security threats, the stakes are getting higher for utilities to provide safe and reliable power. With dwindling internal workforces, utilities rely upon outsourced providers to maintain, upgrade and harden their infrastructure to ensure their ability not only to provide reliable power but also to do it in a manner that is compliant with regulatory safety standards.

Similarly, producers of emissions, whether from industrial manufacturing or production processes, often utilize testing, inspection and monitoring firms to make sure they meet air and water quality standards and emission limits. These same types of companies also frequently rely on liquid waste collection or water treatment providers to ensure regulatory discharge requirements are met and to maintain proper water and waste processing and treatment.

Compelling ESG Demand Drivers

ESG initiatives are driving growth in the environmental, power and infrastructure services subsector as the business and investment communities increasingly incorporates initiatives focused on environmental sustainability and societal impacts into their strategic plans. Examples include increased renewable power generation, heightened focus on limiting emissions and technological advancement to increase the reuse and recyclability of materials.

Today, renewable power sources account for more than 20% of U.S. electricity generation. Trillions of dollars have been invested globally in the build-out of renewable power sources. Such investment will continue at scale, which will provide ongoing opportunities for businesses that offer construction and related services and electricity distribution within this ecosystem. Importantly, the associated renewable power infrastructure will require recurring service, maintenance and repair as it ages, creating attractive growth opportunities for innovators offering high-quality solutions for renewable power infrastructure owners. Beyond renewable power generation, other areas of technological disruption in the electrical ecosystem creating compelling growth opportunities include distributed generation, the build-out of electric vehicle charging networks, the proliferation of battery storage and backup power management.

Just as renewable power and green electricity themes are pervasive, waste diversion and the beneficial reuse of resources represent significant opportunities garnering increasing attention from both corporate entities and the investment community. In a society where minimizing environmental impacts from operating businesses and consuming resources is a top priority, technologies and services that enable waste diversion, the beneficial reuse of resources or recycling material in a cost-effective manner should continue to grow rapidly and create investment opportunities. //

RYAN JACK is a partner at Ridgemont Equity Partners and focuses on investments in the industrial growth sector, including the environmental, power and infrastructure services subsector.

BY PHILIPP KROHN, PARTNER AND CEO, ALANTRA U.S.

THE OF FUTURE

AI M&A

Following the recent buzz around OpenAI’s ChatGPT, Google’s Bard and Microsoft’s upcoming Copilot, artificial intelligence and data analytics are being discussed in every industry, including financial services.

AI and data analytics are already transforming how we complete M&A deals. Traditionally, M&A has been a complex process involving demanding stakeholders, shifting expectations, lots of data crunching and tight time frames.

However, recent breakthroughs in data analytics and AI have shown the potential to significantly transform the M&A industry in the near future. There is already an opportunity to streamline and automate all stages of the M&A process, making completing an M&A deal more efficient, accurate and cost-effective than ever before.

From sourcing to diligence, artificial intelligence is transforming how deals are done

The areas that are currently benefiting most from these tools are:

PRE-DEAL VALUE CREATION: AI and data analytics can be used to create an impact on the P&L of companies by (i) optimizing business activities (e.g., optimizing supply chain management, energy and resource management, predicting maintenance or enhancing cybersecurity); and (ii) identifying new sources of revenue (e.g., by monetizing data, optimizing the use of customer data for consumer targeting, supporting complementary product development through cross-selling, etc.).

DEAL SOURCING: Where traditional methods of deal sourcing rely on researchers mapping and monitoring company activity or relationships, AI tools analyze real-time market trends and alternative data sources (e.g., website traffic, Google searches and social sentiment) to identify potential targets. This helps M&A professionals source deals more efficiently and effectively. The same tools can then be used to identify potential targets or partnerships for companies looking to utilize M&A for revenue generation, international growth or new product offerings.

DUE DILIGENCE: AI and machine learning tools are already regularly used in due diligence processes to complement and enhance preparing for and executing M&A deals. AI due diligence is used across compliance and risk assessment, information synthesis, information analysis and discovery. This is done by extracting insights from vast amounts of information, reviewing documents and data points, and writing legal documentation—all at a faster speed and with more accuracy than its human counterparts—as well as reducing risk and eliminating the potential for human error.

VALUATION AND NEGOTIATION:

Where valuations are traditionally

model-based, AI can improve accuracy and help predict future financial performance. AI also uses comparable analysis across much wider peer groups or previous transactions. This analysis can be applied to the target company’s financials and used to develop real-time databases serving as the valuation basis or to create valuation adjustment formulas tailored to the target and specific criteria to improve calculation quality. Also, when completing a wider analysis than traditional methods can, there is the potential to unmask additional company synergies and potential risks to ensure a smooth integration. This helps M&A professionals make more informed decisions about potential deals and negotiate better terms for clients.

AI and data analytics are already used in all aspects of M&A and will likely only be more widely available in the next five years. The tools available already have the potential to revolutionize the M&A industry by streamlining processes, reducing costs and improving decision-making. As the technology continues to evolve, we can expect to see more widespread adoption of AI in M&A processes, leading to a more efficient and effective industry.

This is why we are utilizing innovative AI and data analytics solutions to transform our offering at Alantra. We are convinced that digitalization, AI and advanced analytics, in particular, will become a critical differentiating factor in the years to come, as much as global presence or sector specialization has been in the last decade.

However, AI won’t only transform

how deals are done; it will also change M&A opportunities. Companies are increasingly looking to add AI capabilities to enhance their value, regardless of the sector in which they operate. In most cases, they’re adding those capabilities through M&A. With global M&A activity down 48% in the first quarter of 2023 over the year prior and at its lowest levels since the start of the COVID-19 lockdowns, according to Dealogic, AI-related deals are behaving comparatively better. Deal activity in this segment increased by 175% compared with a year earlier in terms of value (up to $12.7 billion vs. $4.6 billion), while deal volume decreased by only 7%, according to GlobalData’s report on Mergers & Acquisitions in TMT.

Corporates are the driving force behind this trend—just look at Microsoft’s investment in OpenAI, Google’s $300 million investment in AI startup Anthropic or Accenture’s acquisition of Objectivity, which Alantra advised on. Comparatively, PE firms only completed 28 AI deals in Q1 2023, worth $432.3 million (vs. $6.8 billion in Q1 2022). The remaining deals were completed by corporates.

We’ll continue to closely monitor this rapidly evolving space, but we believe that AI is additive to advisors in M&A processes. While AI can provide valuable insights, it’s ultimately up to individuals to make the final decision on whether to pursue an acquisition or not. Therefore, a combination of human expertise and AI-powered analytics is likely to be the most effective approach to identifying potential targets and successfully closing deals. //

PHILIPP KROHN leads Alantra’s U.S. operations from New York City. He was promoted to CEO of Alantra U.S. this year, after serving as head of corporate development.

We believe that AI is additive to advisors in M&A processes.

Dry Powder Reserves Point to Insatiable Buyout Demand

BY BRITT ERICA TUNICK

As the old adage goes, timing is everything. From relationships to career opportunities and virtually everything in between, timing is a major factor in determining whether things work out. And it is no different in private equity. Faced with soaring interest rates, market uncertainty and ongoing fears of a recession, PE firms have largely been sitting on the sidelines as they await a more attractive investment climate. Subsequently, the global private capital sector has built up close to $4 trillion in reserves—a stockpile that has forced change in the ways private markets firms approach investing.

COVID-19 may finally be in the rearview mirror, but the fallout from

the global pandemic lingers and has created a mismatch between buyers and sellers. Following paltry M&A deal volume in 2022, deal activity declined even further in the first quarter of 2023 as companies held out for a more attractive deal environment with higher valuations. Meanwhile, the increasing cost of capital, combined with rising interest rates, macro uncertainty, the geopolitical environment and inflationary concerns, has made PE firms more cautious. As a result, the global private capital industry was sitting on $3.7 trillion of dry powder as of June 2023, $1.1 trillion of which is allocated for buyouts, according to Bain & Co.

While uninvested assets in private markets have reached record levels, the capital is waiting to be deployed in a more favorable market environment

GLOBAL PRIVATE EQUITY BUYOUT DRY POWDER ($B)

“When you’re in an environment like this, there’s a lot of volatility and people aren’t sure what’s going to happen next. So, a lot of PE firms are sitting on their hands right now,” says Brian McGee, a managing partner at Boca Raton, Florida-based PE firm New Water Capital.

Behind the Curtain

The high levels of dry powder and declining deal volume don’t mean that the market is entirely at a standstill. Investors are very selective about doing deals. “The environment we’re seeing is ‘barbelled.’ We see really high-quality, class A deals getting done, and we see the lower end of the market where deals need a lot more TLC. What we’re not seeing is that middle tier,” says Marc Chase, a partner and private equity leader at

Baker Tilly. “The good businesses are nervous about the market, and if they don’t see a favorable multiple environment for their company, they’re just going to wait it out.”

Chris Wright, managing director and head of private markets at Crescent Capital Group, notes there are still opportunities in add-ons, too. “You have a lot of small transactions where companies are buying other companies. These are add-on acquisitions and platform investments that are held by private equity, and not all of those are getting recorded on league tables,” he says. One problem Wright thinks is keeping M&A at bay is the valuation mismatch. “Equity markets continue to be elevated at the same time that cost of capital has gone up, yet sellers expect good prices while buyers want discounts,” he says.

LP Perception

Nonetheless, LPs are not putting pressure on PE firms to deploy capital. “Many LPs deployed significantly into private markets, and the distribution in their own portfolios has dried up, given that lack of exits. … If the capital calls aren’t coming, that’s actually convenient for some LPs,” says Jared Barlow, a partner at Greenwich, Connecticut-based Kline Hill Partners, which focuses on investments in the secondary market. “The mindset of both GPs and LPs is that if there’s no rush, deploy with prudence.”

And with expenditures and investments outpacing fundraising, industry professionals say that the amount of dry powder has already begun contracting. Added to that is the fact that fundraising in the current

Source: Preqin and Bain & Co.

environment is extremely difficult for PE firms. Between the downturn in equities over the past couple of years, unweighted portfolios and a lack of returns from PE investments, there is a general dearth of liquidity within the LP community at the moment. In fact, as investors are repositioning their portfolios, there has been a wave of secondary trades among LPs.

James Cassel, CEO and co-founder of Miami-based investment banking firm Cassel Salpeter & Co., agrees that most investors would be content to give PE firms another year or two to recognize the value of their investments. But he believes there are likely to be many cases where the current market conditions make that difficult or impossible for PE firms. “A lot of PE firms that did deals a few years ago stress-tested their companies for interest rates going up 100 or 200 basis points. But I’m not sure they stresstested for a 500-point increase,” says Cassel. “The concern comes in if they still own the portfolio company and are going to continue to own it, but the debt comes due and they’re going to have to refinance at a higher price.”

The Private Credit Opportunity

One area where the PE community is seeing a pop in activity is private credit. As small and midsize banks have backed away from lending following the recent bank collapses, industry experts predict that direct lending will continue to pick up speed. According to Moody’s, private lending to PE-owned middle-market companies is one of the quickest growing areas, with roughly $1.3 trillion in assets under management, $350 billion of which is dry powder. “We’ve seen a lot of demand growing for junior debt in both new investments, as well as support of existing investments,” says Crescent Capital

Group’s Wright. “Part of that big opportunity is the highly leveraged transactions that were put together in 2021 and 2022 that now need some help—including through the issuance of preferred equity and partial PIK securities,” he says. Adds Baker Tilly’s Chase: “The current interest rate environment and the turmoil in the banking sector have created an opportunity for alternative debt funds, and I imagine that will continue for the remainder of this year.”

Despite the market calamity, several well-known private debt managers have recently raised large funds. They include HPS, which closed its Core Senior Lending Fund II at $10 billion in June; Oak Hill Advisors, which garnered $2.2 billion for its Credit Solutions Fund II in May; and Neuberger Berman, which collected $8.1 billion for its Private Debt Fund VI last September.

Looking Ahead

Many PE firms are bracing for an uptick of M&A activity in the third and fourth quarters of this year. Regardless of whether economic conditions improve, the expectation is that PE firms will have to finally start exiting some positions in the coming months. “Even setting aside the capital markets and the LBO and loan markets, the hold time on everyone’s portfolio companies is increasing to a point where there’s going to have to be some more selling happening,” says Jennifer Smith, a partner in Bain &. Co.’s PE practice. In the meantime, she says that PE firms need to focus on where they can add value to their portfolio companies to make them more appealing when those exit opportunities finally do arise. “As dry powder comes down and deal markets pick up, you’re going to see a little bit more of a buyer’s market where it’s going to be more competitive,” says Smith.

CEO

Anthony Arnold, a partner at Barnes & Thornburg, says there has recently been a noticeable jump in activity levels. “We are seeing the beginning of a shift from a wait-and-see approach to an actual deployment of capital,” he says. “In just the last two weeks, our middle-market clients issued as many letters of intent as they did from January to the end of May.”

As PE firms begin to pick the sectors and companies they believe will present the most promising exit opportunities, industry experts say firms should be aware there could be a bit of traffic when people finally do step off the sidelines.

“Now is the time that firms should be evaluating and creating their teams in anticipation of when the market is going to turn,” says Baker Tilly’s Chase. //

BRITT ERICA TUNICK

is an awardwinning journalist with extensive experience writing about the financial industry and alternative investing.

A lot of PE firms that did deals a few years ago stresstested their companies for interest rates going up 100 or 200 basis points. But I’m not sure they stress-tested for a 500-point increase.

JAMES CASSEL

and Co-founder, Cassel Salpeter & Co.

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MIGUEL ZABLAH

Miami-based alternative investment manager Leste Group appointed Miguel Zablah as director and head of investor relations.

In his new role, Zablah will manage investor communications globally across Leste’s private equity, real estate credit and special situations strategies.

Before joining Leste, Zablah served as vice president of investor relations at I Squared Capital and head of investor services at H.I.G. Capital.

He also held various alternative investment positions at J.P. Morgan in multiple offices, including New York, Boston and Australia.

MATT MOULEDOUS, PAULA SCHUMACHER AND ALI WASHER

Mississippi-based Hancock Whitney named three seasoned commercial finance professionals to its asset-based lending (ABL) division, Hancock Whitney Business Capital.

Ali Washer, Paula Schumacher and Matt Mouledous will focus on building the asset-based lending platform for middle-market clients, primarily in 12 southern states.

Mouledous will serve as a senior portfolio manager and underwriter. Before Hancock Whitney, he was vice president and senior underwriter at MidFirst Business Credit, vice president of finance at Transpend Solutions and vice president at Wells Fargo Capital Finance.

Schumacher will take on the role of senior ABL analyst. Prior to Hancock Whitney, she was senior auditor at Allied Financial Corp.

Washer will be the asset-based lending operations manager. Before Hancock Whitney, she was vice president and director of operations at MidFirst Business Credit and vice president, operations at Wall Financial Services.

Mountain Ridge Capital, a Plano, Texas-based asset-based lending firm, has appointed Daniel Williams as managing director of business development for the Northeast region.

Williams has a business development and deal structuring background and will play a pivotal role in expanding the company’s presence in the Northeast.

Before joining Mountain Ridge, he worked at Eclipse Business Capital and Great American Group as a managing director. He has also held senior roles at investment banks, including BNP Paribas and HSBC.

DANIEL WILLIAMS

DAVID ROBERTS

Boston-based private equity firm Great Hill Partners appointed David Roberts as a managing director.

Roberts will join the firm’s digital commerce team to focus on investments across e-commerce, marketplaces, consumer products, services and adjacent enabling software verticals.

Before joining Great Hill, Roberts worked at Advent International, where he focused on investments in growth businesses in the consumer sector.

Prior to Advent, Roberts worked as an associate for the PE firm Quadrangle Group, where he focused on investments in media and telecom in North America and Asia, and at Bear Stearns in New York as an investment banking analyst.

He currently serves as a director of Sovos Brands, an investor in packaged food brands, where he chairs the nominating and corporate governance committee.

MATTHEW FLYNN AND HUDSON COLLINS

Chicago-headquartered investment bank William Blair has expanded its Private Capital Advisory practice by appointing Matthew Flynn as managing director and Hudson Collins as director.  Based in Charlotte, North Carolina, Flynn will focus on fund placement in the Mid-Atlantic, Southeast and South regions, while Collins will operate from New York.

Flynn brings 17 years of private fund placement experience to the role, having previously served as managing director in private capital advisory at Campbell Lutyens and as a director in the private funds group at Credit Suisse.

With over 10 years of private fund placement experience, Collins has held roles as director and vice president at Credit Suisse, as vice president at Eaton Partners, as an associate at MVision Private Equity Advisers and as an investment banking analyst at McColl Partners.

GARY MERCER AND SHANE WRIGHT (PICTURED)

Boca Raton, Florida-based private equity firm AE Industrial Partners appointed Gary Mercer and Shane Wright as special advisors.

Before AE Industrial Partners, Mercer was a vice president and general manager of engineering at GE Aviation. He also worked at GE Energy as the global engineering leader for GE’s Renewable Energy business.

Wright is a seasoned aerospace finance executive who has served as senior vice president and chief financial officer for GE Aviation, overseeing financial strategy for GE Aviation’s $30 billion aerospace business. He also worked as the chief financial officer for GE Healthcare International and GE Transportation and as a vice president of finance for GE Insurance Solutions.

AAKASH BHASIN (LEFT) AND PETRU-SANTU ACQUAVIVA

Alantra, a global mid-market financial services firm, hired Aakash Bhasin and Petru-Santu Acquaviva as managing directors in the firm’s New York City office.

With over 25 years of investment banking expertise, Bhasin will focus on building products and industrial technology.

Before joining Alantra, he served as a managing director at Wells Fargo Securities, where he concentrated on industrials M&A. Before that, Bhasin worked at J.P. Morgan and founded his own M&A boutique firm, Turtle Bridge Advisors.

Acquaviva, who has more than 15 years of investment banking experience, will concentrate on industrial services.

He most recently held the position of head of industrial services investment banking in BNP Paribas’ Investment Banking group. Acquaviva has also worked at ENGIE and Leonardo & Co., where he focused on energy and infrastructure M&A.

DAVID LIGON

Private equity firm TSG Consumer Partners has announced the appointment of David Ligon as managing director, capital markets.

In his new role, Ligon will manage the firm’s capital markets function and support the development and implementation of tailored solutions for both new and existing partner companies.

Ligon has nearly 40 years of leadership experience in the banking industry, specifically supporting growing middle-market companies across the United States.

Prior to joining TSG, Ligon served as managing director and capital markets head for EastWest Bank, where he led the bank’s sponsored lending group.

Throughout his career, he has held senior leadership positions in leveraged finance at institutions such as OneWest Bank, US Bank, Emporia Capital and Union Bank. Ligon began his career at Wells Fargo Bank.

DUSTIN HOLLAS

Houston-based private equity firm Capstreet Group has appointed Dustin Hollas as principal of business development.

In his new role, Hollas will focus on sourcing new investment opportunities. Before Capstreet, he worked at Houston-based growth equity firm Clovis Point Capital as vice president, focusing on the firm’s deal sourcing activities.

Hollas previously managed the Houston market as vice president for Comerica Bank’s Technology and Life Sciences Group, where he specialized in providing lending, treasury and investment solutions to early-, middle- and late-stage companies.

PAUL EDWARDS

Boston-based M&A strategy consulting firm

Stax promoted Paul Edwards to global practice leader. In this new role, Edwards will develop and execute the firm’s strategy. He has worked at Stax for 18 years and has held several senior positions, including senior managing director and managing director.

Before joining Stax in 2005, Edwards was director of business development and strategy at Studysmart, lead contract consultant at STS Research Group, and founder and chief executive officer at BtG UK, a global education consulting firm. He began his career as an analyst at PwC UK.

JON MCCARTHY

Charlotte-based private investment firm Summit Park promoted Jon McCarthy to vice president.

With Summit Park since 2019, McCarthy has been an investment team member and works closely with home products and services portfolio companies Ledge, United Air Temp and Exacta. He also actively participated in the firm’s recent exits of Parkline, a manufacturer of metal buildings for industrial and commercial applications, and Aspirent Consulting, a data and analytics and digital transformation consultancy.

Before joining Summit Park, McCarthy was an analyst at BlackArch Partners and a tax associate at KPMG.

What’s Next

EMERGING INDUSTRIES AND TRENDS IN DEAL SOURCING

NEXT TARGET

Investors look beyond product success to overcome the supply chain challenges of lifesaving gene and cell therapy development.

BEHIND THE DATA

34

ON THE HORIZON

Recent findings from GF Data reveal a divided market—where coveted businesses trade at a premium and others sell at diminished valuations—along with insights into debt financing.

30 36

Like with dating, it’s hard for business sellers to find the best match. Here’s how dealmakers can improve their chances of connecting with the right buyers.

ON THE HORIZON

A managing director from Stax outlines four successful strategies for mid-market firms as they seek to innovate.

Manufacturing M&A Success Among Gene and Cell Therapy Innovators

Investors

BY CAROLYN VALLEJO

Fragmented markets ripe for consolidation are often considered lucrative opportunities for private equity and strategic acquirers alike. But in the gene and cell therapy space, currently dominated by thousands of small and midsize players, the acquisition opportunity is less straightforward.

That’s because this industry comprises developers targeting highly individualized therapies, each with bespoke manufacturing processes that create a large barrier to scale.

Today, there are just 27 FDAapproved gene and cell therapies, but more than 2,000 gene and cell therapy clinical trials are currently underway.

The Food and Drug Administration expects to approve 10-20 new therapies a year by 2025 as demand grows

for this technology, whose applications range from rebuilding damaged cartilage to treating cancer and neurological diseases.

As a result, investor interest remains piqued, even in a challenging dealmaking environment. “As it relates to M&A, I have never had as much inbound deal flow as I have had this year,” says Anna Marie Wagner, senior vice

president

and head of corporate development at Ginkgo Bioworks, a publicly traded biotechnology and cell programming platform.

But it’s not necessarily the therapy product itself generating investment opportunity. For educated gene and cell therapy investors, M&A success is increasingly found in the sector’s underlying manufacturing processes.

look beyond product success to overcome the supply chain challenges of lifesaving therapy development

Manufacturing

M&A Success

Wagner, who has prior experience as a private equity investor, says that the investment opportunity in the gene therapy market is vast but not necessarily for everyone. “It’s a very challenging place for private equity to play historically,” she notes.

That reality is not lost on Noah Rhodes, managing director and head of private equity at Great Point Partners, a healthcare PE firm active in this space. Great Point’s portfolio includes cell and gene therapy manufacturer Cellipont Bioservices (previously known as Performance Cell Manufacturing), which secured a strategic debt facility from healthcare investor OrbiMed, also backed by Great Point, earlier this year.

Rhodes acknowledges the challenges of this space, especially when it comes to manufacturing. “There are a lot of learning curves that one has to climb in order to be comfortable investing in some of these niche areas of the biopharma supply chain,” he says.

Unlike blockbuster drugs that can be mass-produced, gene and cell therapies are unique to each patient. Cell therapies involve manipulating the function of cells or introducing healthy cells to replace diseased or damaged ones; gene therapy genetically modifies cells to replace or inactivate disease-causing genes. Each treatment is tailored for a specific individual. “It’s a one-to-one ratio, meaning each manufacturing batch is for one patient,” Rhodes says. “That’s not terribly scalable.”

Great Point focuses on the lower

end of the middle market and prioritizes becoming a collaborative partner with gene and cell therapy developers as a minority or majority stakeholder. This approach, explains Rhodes, allows Great Point to be more agile and connect targets with needed capital more quickly than some larger PE investors can.

The firm begins assessing potential targets from their earliest stages, focusing on quality of processes (like safety and sterility of facilities) rather than on the binary success or failure of the product. This approach positions portfolio companies well for exit. “We find that strategics like to buy businesses from us, because we’ve done the work to institutionalize the companies, professionalize them to a point where strategics can step in and take it to the next level,” Rhodes adds.

Ginkgo is one of those strategics, and similar to Great Point, the company isn’t necessarily interested in whether a target’s product is actually successful. “When Ginkgo acquires assets, we’re typically not acquiring the therapeutic candidate itself. What we’re focused on acquiring, and therefore integrating, is

the key underlying enabling technology,” Wagner says.

Sometimes, a gene or cell therapy developer’s product has failed, but its underlying intellectual property, data and manufacturing technologies still hold potential for other developers to use. In other cases, a developer may sell its underlying IP and technology to access capital for ongoing therapy development, allowing an acquirer like Ginkgo to license that IP back to the business, as well as open up the IP to other developers on its platform.

In both scenarios, Ginkgo aims to alleviate some of the industry’s manufacturing challenges. “As we look at M&A, we are looking to bring in those technologies so that we can offer our customers a one-stop shop, integrating that broader set of tools and bringing in a bespoke solution to them for their products,” says Wagner.

Factory in a Box

As acquirers explore ways to address the gene and cell therapy development space’s manufacturing challenges, some industry players are confronting the problem head-on.

All of these companies are coming down the pike, and all of them need manufacturing solutions once they get FDA approval to actually meet patient demand.

FABIAN GERLINGHAUS

Co-founder and CEO, Cellares

One such business is Cellares, which has designed a so-called “factory in a box,” dubbed the Cell Shuttle, to scale cell therapy manufacturing from one patient at a time up to 16 using endto-end automation.

That commercial scalability will be key to supporting the industry’s future, says Fabian Gerlinghaus, co-founder and CEO of Cellares. “There are more than 2,000 cell therapies in development at the moment,” he says. “All of these companies are coming down the pike, and all of them need manufacturing solutions once they get FDA approval to actually meet patient demand.”

Today, there are 19,641 companies operating in the gene and cell therapy space with revenues below $1 billion, according to Grata, a private company intelligence engine. About 90% are small businesses with revenues under $10 million.

Gerlinghaus expects M&A consolidation to accelerate among therapy developers, especially considering the challenging credit climate today that has made venture capital fundraising more difficult. “But I don’t really see that as a challenge for us, because we’re not a biotech company developing cell therapies,” he notes, adding that the expansion of the industry drives demand for scalable manufacturing capabilities like those offered by Cellares.

To date, the company has raised $100 million in venture capital across two funding rounds. Since its launch in 2019, the business has grown to about 150 employees, with expectations to reach 200 employees by the end of the year. “Investors who really understand this space see an

opportunity here to build a $100 billion company,” says Gerlinghaus. “I believe we’ll raise more money at some point, and raising money from the private markets as well as the public markets are both in the cards.”

What’s Ahead

Even considering the immense challenges to large-scale commercialization of gene and cell therapies, as well as downward macroeconomic pressures, investors remain optimistic.

Regulatory support behind the sector contributes to investor confidence. While compliance can be a roadblock for some innovators in other markets, regulators appear poised to collaborate with gene and cell therapy players to launch more lifesaving products. “Regulatory bodies will actually look to industry participants to say, ‘You guys are on the front line. What are you learning about these products? How

should we be thinking about defining safety? Please work with us to help create a safe research and development ecosystem,’” says Great Point’s Rhodes.

Earlier this year, FDA official Peter Marks called for “regulatory convergence,” urging global regulators to align their therapy approval standards and timing to deliver more therapies to patients with rare diseases faster. In addition to regulatory support, efficient manufacturing will be vital to connecting patients to these therapies more quickly and at more affordable price points.

Investors can play an impactful role in supporting that effort. “If you save the lives of millions of patients, it means you’re building a very, very valuable company,” says Gerlinghaus. “And I think a lot of investors will see that.” //

CAROLYN VALLEJO is Middle Market Growth’s digital editor.

Looking for Buyers in All the Wrong Places

BY NEVIN RAJ, CO-FOUNDER AND COO, GRATA

As deals slowed down this year, the words “deal sourcing” graced the headlines pretty frequently. But I think there’s an aspect of dealmaking that needs a little more love: exits.

You know, the way you create returns for LPs.

What’s tricky about exits is building a strong list of potential buyers. Why is this tricky? It’s deceptively difficult. Most dealmakers would shrug and say, “Easy. I know where to go for my lists.” But there are a few strategies you can use to build an even stronger buyer list that goes beyond your usual suspects.

Broaden Your Search

If you feel confident in your buyer list, I’d challenge you to go back and review it. How much out-of-the-box thinking do you see in that list?

Take, for example, a dealmaker that’s selling a business process outsourcing (BPO) company that provides HR services.

Selling a BPO, it wouldn’t be surprising if this dealmaker’s initial list included firms whose portfolio companies include similar service companies. But the strongest buyer lists go one step further. They include new kinds of buyers, like recruiting or consulting firms looking to expand their services.

However, like dating in the 21st century, it’s getting harder to make the right connections.

Without the right technology, you can’t easily sift through every firm’s investment criteria and determine how that broad, generic wording plays out in their investment history.

You’re left in the dark searching for the best match for your investment.

Buyer Intent—Who’s Looking for You

You’ve likely got a list of expectations. And yes, we are sticking with the dating analogy!

Instead of height or hobbies, we’re looking at buyer intent. If you can rank your buyer list by buyer intent and expend the appropriate amount of resources for each—some companies don’t deserve that second date—you’re much more likely to find the best buyer in the least amount of time.

As you build your list, consider:

• ACQUISITIVENESS. You can assess this by looking at the number of total investments the firm has made and the relevant investments it has made in your space. Is it executing a roll-up with many add-on acquisitions? Is the firm investing around a theme?

• RECENCY. When was the firm’s last investment and exit? This will help you understand if it is in the market or if the deal you’re seeing is stale.

• INVESTMENT MANDATE

BUY). The be-all and end-all for financial buyers will be their mandate. Can they (and will they) invest in the revenue or EBITDA of the target? For strategic buyers, do they have enough market cap, cash or revenue to do the deal? If they can’t afford the deal, there’s no deal to be done. Conversely, if the deal is too small, it’s not going to be worth their time.

(ABILITY TO

• FINANCIAL SPONSORS VS. STRATEGIC BUYERS. A financial buyer will likely run a faster due diligence process, but a strategic buyer will likely have more alignment and can pay higher multiples. Each has different goals and needs to be approached differently.

The Right Places

This kind of list building is crucial not just when it comes to exits but also when raising a fund or attending an event. It’s a skill the leading dealmakers already have, aided by the right technology.

Pulling in up-to-date acquisitions to understand a market, searching across them and ranking firms by their intent should take seconds, not hours. If you’re missing this data, you just might be looking for buyers in all the wrong places. With Grata, you can search across 20,000 financial sponsors and 100,000 strategic buyers based on their investment criteria and past deals to build the most comprehensive, most accurate buyer lists.

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

Costly Capital

GF Data’s findings reveal a growing dichotomy across deals and the impact of changing dynamics in the debt market

The stage was set coming out of 2022 for disruptions in middle-market private equity financing, and the first quarter delivered.

Meanwhile, a 1% increase in average fees on subordinated debt and smaller increases in average coupon and payment-in-kind notes pushed all-in pricing to 16.8%, up 2% from the average for all of 2022.

Despite this, GF Data recorded an average purchase-price multiple across all transactions of 8.1x trailing 12 months (TTM) EBITDA for all reported deals with total enterprise values between $10 million and $500 million. That was well above the 6.9x average recorded in the fourth quarter of 2022 and close to that year's third quarter average.

But it was really a tale of two markets and, depending on where you looked, it was the best of times or the worst of times.

BOB DUNN Managing Director, GF Data

After a modest rise in the cost of capital at the end of 2022, average pricing on senior debt tracked by ACG’s GF Data shot to 8.1%—a marked jump from the 6.9% average recorded in the fourth quarter. That’s also the highest interest rate on senior debt GF Data has seen since early 2007.

On the positive side we noted a rather large group of platform deals valued between $10 million and $50 million with an average purchase price multiple of just over 12x.

At the other end, we saw a noteworthy number of manufacturing and distribution businesses valued between $50 million and

PRIVATE EQUITY DEBT PROVIDERS, Q1 23/Q1 22

SENIOR DEBT PRICING BY PROVIDER AND DEAL TYPE, 2023 YTD

$250 million trading below 5x. It appears that in a rising interest rate environment, business owners decided—or were compelled—to sell for fear that additional disruptions to the debt markets would kill their chances later in the year.

We see further evidence of the dichotomy when we investigate the spread in frequency and purchase price for above-average financial performers. (GF Data defines aboveaverage financial performers as companies with a minimum 10% EBITDA margin and a minimum 10% TTM revenue growth.)

In 2022 through the third quarter of that year, GF Data recorded the highest incidence of above-average financial performers since inception, comprising 71% of transactions reported. Since then, that trend has reversed, with above-average financial performers comprising just 53% of completed deals in the first quarter of 2023—on par with the historical average of 53%. This tells us that in the first quarter of 2023, more average companies

traded and at more average prices. (The premium for above-average financial performers also reached a historic high in the first quarter of nearly three turns of EBITDA—9.2x versus 6.4x for other buyouts.)

In addition to higher interest rates, the makeup of the debt market also changed in the first quarter, which saw a decrease of more than 14% in commercial bank financings and an increase of more than 10% in non-bank financings. (See chart.)

Average equity commitments from reporting private equity firms also increased in the first quarter. GF Data’s reporting private equity groups committed an average of 59% equity to first quarter investments, in part to make up for declining debt.

Senior debt contribution across all platform deals decreased to 30.5% in the first quarter, down from an average of 34.1% for all of 2022, while the average subordinated debt contribution fell to 10.5% from an average of 11.2% last year. //

BOB DUNN is managing director of GF Data, an ACG company. 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, GF is extending the range to $500 million.

The Innovator’s Dilemma for Mid-Market Companies

BY VINCE ZOSA, MANAGING DIRECTOR, STAX

The Innovator’s Dilemma” by professor Clayton Christensen is the foundational guide on business innovation for leading market incumbents dealing with the threat of disruption. For mid-market firms, many under PE ownership, the primary dilemma is a more practical one: injecting innovation into the organization to drive future growth while managing limited resources and the need for rapid investment returns. At Stax, our work with older economy companies is pragmatic and driven by the operator’s need to spark innovation without compromising current performance. Here are four successful strategies for midmarket firms to deliver on innovation.

1. Fail fast. Fail fast is more than just a slogan. When assessing an organization’s readiness to invest in innovation, we inquire about its approach and speed in handling failed projects. Innovative companies prioritize rapid experimentation, recognizing the opportunity cost of unsuccessful ideas and making swift decisions. Innovation culture entails persistently exploring multiple ideas and allocating greater resources to the most promising ones. Adopting modern methods for rapid prototyping, digital modeling and obtaining voice of customer data accelerate idea evaluation, an area where many mid-market firms lag. Innovation should be measured in days and weeks, emphasizing the need for speed.

2. Commit to real resourcing through an innovation agenda. Google’s celebrated 20% model allows engineers to use one-fifth of their time to work on selfselected projects that foster innovation, including ones that have resulted in successful products like Gmail and Google Maps. For mid-market companies, the challenge lies not in allocating the 20% of time but in identifying the capacity without adding resources. To address this, firms should scrutinize current resource support models, especially for activities aimed at maintaining market share. Often, functional teams supporting major

products naturally scale over time, with less emphasis on ongoing efficiency. Mature products, especially ones in the later stages of their life cycle, should be the ones that source capacity for innovation. Active project resource planning and reallocating limited engineering talent are crucial practices for any innovation program.

3. Extend the innovation mindset beyond product development. A myopic view of innovation limits creativity to new products and services. An innovation mindset should cover all functions that improve day-today operational performance, as well as customer-facing and go-to-market activities. Chobani’s remarkable growth resulted not only from the company’s superior product qualities (better tasting, healthy Greek yogurt) but also its innovative approach in marketing yogurt as a highprotein, low-calorie meal replacement. Chobani transformed yogurt’s perception beyond a snack. Innovative firms foster creativity beyond product development.

4. Establish a balanced innovation scorecard. To maintain commitment and momentum for an innovation program, it is essential to measure progress beyond financial metrics. Celebrate successful ideation sessions, improvements in operational efficiency or allocation of resources to innovation-related projects. By highlighting early wins and sharing examples of the innovation mindset throughout the organization, innovation can be embedded more deeply.

Mid-market leadership teams are increasingly prioritizing innovation as a means to drive growth. The challenge lies in determining the most effective approach to cultivate innovation as an organizational capability. By implementing key practices, the journey has an increased likelihood of early wins and long-term success. //

VINCE ZOSA is a managing director at Stax, focused on value creation and data analytics within industrials, B2B services and technology.

40

COVER STORY

Although mid-market M&A hasn’t yet fully rebounded, dealmakers point to promising signs for the remainder of the year.

46

TREND FEATURE

An in-depth look at the strategies that PE investors are using to fund companies, close deals and extend their holding periods.

KENNETH WASIK Managing Director, Consumer and Retail Practice Leader, Capstone Partners

We’ve seen a bit of a shift from, say, the fourth quarter of 2021, when there were a lot of buyers and no sellers. Now we’re seeing more sellers and fewer buyers.

SIGNS of LIFE

Private equity deal activity is slowly rebounding, but buyers and sellers must get creative on deal terms for transactions to work

McCann

ILLUSTRATIONS BY Eva Vázquez WRITTEN BY Bailey

So far, 2023 has not been M&A’s year. High interest rates, inflation, recession risk and a difficult borrowing environment are all keeping deal flow at a near standstill. Buyers and sellers both say they want more certainty and, ideally, less-expensive capital before pursuing new exits and deals. Whether either of those things materialize is an open question.

The pressure, however, may be more acute for private equity fund managers that have started to hear from LPs about the lack of distributions and limited new deals from funds currently in their investment period. If current conditions persist, general partners may have to fall back on the tips and tricks of private equity veterans who managed to close deals in the 1980s and ’90s, when interest rates were much higher than they are today.

Still, sources Middle Market DealMaker spoke to for this story expressed cautious optimism. Most noted a slight uptick in interest from both buyers and sellers toward the end of May as markets gained more clarity, thanks to the federal debt ceiling agreement and fresh jobs numbers showing a strong labor market.

CLOUDS PARTING

Sources’ cautious optimism was reflected in recent mergers and acquisitions data. Q1 M&A figures from GF Data, an ACG company that tracks private M&A transactions, shows some slightly positive indicators.

GF Data reports on deals with a total enterprise value (TEV) of $10 million-$500 million and TEV/ trailing 12 months adjusted EBITDA of 3x-18x. Its private equity contributors reported 70 transactions that met those criteria in the first quarter. That deal volume is slightly above Q4 of 2022, which had 64 deals, suggesting deals are getting done, even if they require a bit more patience and creativity. The deal count is on par with Q3’s 70 deals and down from 92 deals in Q1 2022.

Data from S&P Global, which tracks a broader swath of deals, shows a steady decline in global deal count, with about 8,000 deals being completed through most of the second quarter (through June 16), compared to 11,000 in Q1 and 13,000 in Q2 last year, while deal value has fluctuated (see chart).

Kenneth Wasik, managing director and leader of the consumer and retail practice at investment bank Capstone Partners, says a change in the dynamics between buyers and sellers may be impacting the pace of transactions this year.

“We’ve seen a bit of a shift from, say, the fourth quarter of 2021, when there were a lot of buyers and no sellers. Now we’re seeing more sellers and fewer buyers,” he says.

Matthew Carlos, principal at Florida-based middle-market private equity firm New Water Capital, is seeing this trend specifically within family- and founder-owned businesses. “These are folks who want to sell based more on life decisions,” he explains. “There is a group of people out there who are getting older or who made it through the past handful of years, and they are ready to punch out their ticket and go home. If someone can get several million dollars, that’s still a lot of money even if it’s a challenging market environment.”

GPs may be feeling the pressure, too, given the limits of investment timelines and fund life cycles. “There is still an ocean of capital out there that needs to be deployed, and investors are still looking for yield, so we may start seeing some pressure to transact,” says Brendan Burke, managing director and head of sponsor coverage at Capstone Partners. Sources agree that for buyers, the issue right now is finding the right comfort level.

Michael Ewald, partner at Bain Capital Credit, says he’s hearing from would-be buyers that the

If we do go into a recession, no one wants to have overpaid in an environment that's already more expensive because of where rates are at.

MICHAEL EWALD Partner, Bain Capital Credit

GLOBAL M&A ACTIVITY SINCE Q2 2021

Data compiled June 16, 2023. Analysis includes global M&A deals announced between April 1, 2021, and June 16, 2023. Excludes terminated deals. Transaction value is as of announcement date. Deal value used when transaction value is not available. Transaction value = deal value paid for equity, plus the value of any assumed long-term debts.

Source: S&P Global Market Intelligence.

© 2023. S&P Global Market Intelligence. All rights reserved.

NO. OF DEALS

TOTAL ENTERPRISE VALUE/EBITDA

TOTAL DEBT/EBITDA

Source: GF Data, based on reporting from 382 total private equity contributors, including 279 active contributors

Managing

potential for a recession still looms large, despite the agreement to suspend the U.S. debt ceiling and a slower pace of interest rate increases. “I don’t think it’s a question of buyers not wanting to do deals, but there is this issue out there where, if we do go into a recession, no one wants to have overpaid in an environment that’s already more expensive because of where rates are at,” he says.

Recession risk means that most of the deal activity so far this year is concentrated in so-called “recession-protected” industries like healthcare or business services, where demand for services is likely to persist even in an economic downturn. Capstone is also seeing interest in food companies and some categories of niche and specialty manufacturing.

Capstone’s Wasik adds that when buyers are pursuing deals, they are “focused on add-ons or core specialties in addition to recession-protected companies. ... Given where the leverage market is at, smaller deals are easier to get done.”

People are waiting on the sidelines, but they can’t wait forever.

We are starting to see a slow pickup of activity that is giving us some hope for later in the year.

SCOTT GREEN

Director, Antares Capital

STRIKING THE RIGHT BALANCE

Even if markets get more clarity on the macroeconomic picture and deal activity picks up, those transactions may look considerably different in structure from deals signed just a few years ago. Debt is hard to come by right now and, even if it becomes easier to access, interest rates have influenced how much leverage companies can afford.

“Rising rates suck a lot of free cash flow out of companies. It’s almost like a tax,” Bain’s Ewald says. “You could have a company that’s doing well, but with rates where they are, it changes the math on leverage, and we’re seeing terms change in response.”

Sources say GPs are putting more equity into deals than they might have otherwise, with the hope of refinancing in the future. Structuring a transaction has also become more cumbersome. More proof of performance is required, and earnout and performance timelines are lengthening. New Water’s Carlos says they’ve looked into “performance payments, or seller financing as part of our equation to get deals done. We’re seeing more willingness from the seller side and investment bankers to think through creative ways to get these deals done.”

The focus on terms could increase over the next several months—especially if buyers are worried about overpaying in this environment. Trends in valuations could also be adding some pressure. A recent GF Data report shows that valuations are starting to tick up after coming down in the back half of last year.

Valuations on deals completed in the first quarter of 2023 averaged 8.0x TTM adjusted EBITDA, rebounding from the 6.9x average recorded in Q4 2022 and in line with the 8.2x average set in the third quarter, according to GF Data’s first quarter report. On an annualized basis, 2023 got off to an aggressive start in terms of valuations, with the 8.0x average significantly above the 7.6x average recorded for all of 2022.

According to S&P Global, deal value was about flat between the first and second quarter, while representing a smaller number of deals, suggesting that sellers are still putting premium assets up for sale. Sources say that although the pace of transactions has slowed broadly, the highest quality deals across industries are still commanding a lot of interest and a premium price.

The potential for new activity because of greater market certainty could also have an impact.

“People are waiting on the sidelines, but they can’t wait forever,” says Scott Green, managing director at middle-market private debt firm Antares Capital. “We are starting to see a slow pickup of activity that is giving us some hope for later in the year.” He adds that as buyers and sellers get more comfortable with the overall environment, that could lead to more deals getting done.

THE WAITING ROOM

Sitting on the sidelines could have an impact of its own. Jeffrey Stevenson, managing partner at private credit firm VSS Capital, says that he’s working with companies that are postponing a sale and opting for other forms of financing while they wait things out.

“We are seeing more companies choose not to go to market in this environment and instead pursue structured capital solutions. We think this could be a longer-term trend—traditional debt financing is likely to remain tight for at least the next 12-18 months,” he says. “Companies prefer structured capital because they don’t have to give up control.”

Structured capital and preferred equity can be used to support business operations and bolt-ontype expansion plans in lieu of a traditional buyout. However, Capstone’s Burke notes there’s a bit of a balancing act with interim strategies, too.

“If everyone waits and then comes into the market based on the same set of signals, it’s going to be that much harder for your deal to stand out,” he says. “That can impact purchase price, deal economics.”

New Water’s Carlos agrees. “You have to weigh the pros and cons. If you can get more visibility on a high performing asset now, even in a skittish environment, there still might be an advantage over trying to stand out when everyone is suddenly in market.”

Carlos adds that sellers might be surprised if they do want to sell right now. “At the end of the day, private equity GPs are capital allocators. We have a shot clock on deployment. So if there is a premium asset out there that is within your mandate, you have to at least look at it because it’s within your mandate.” //

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

BRIDGING THE Gap

At a time of decreased deal flow and mismatched valuation expectations, investors are using creative tools to provide capital to companies or extend the life of their funds

BY ANASTASIA DONDE

With various stressors weighing on the investment industry, deal flow for traditional platform buyouts has declined and valuation expectations have also fallen. Rising interest rates and inflation, the collapse of several regional banks, and declining equity values have all changed the game for M&A practitioners. Some are waiting on the sidelines while market conditions improve, while others are employing specialty investment strategies to bridge the pricing gap or agree to terms when there is a valuation mismatch.

Some of these tools—like preferred equity or mezzanine funding—are used to help companies in need of capital for growth or add-on acquisitions while traditional debt or equity financing is unavailable. Other strategies like earnouts, seller notes and ratchets get tapped to close a deal when there is disagreement on valuation or performance metrics between the buyer and seller. Net asset value (NAV) lending and continuation funds, meanwhile, are becoming popular ways for private equity funds and portfolio companies to extend their runway before an exit.

These instruments are often costly and create complex capital structures or throw the priority in which lenders and investors get repaid out of order. But investors say they’re still useful options at a time when access to traditional equity and debt capital is challenging. We explore some of these strategies in detail below.

EARNOUTS AND SELLER NOTES

A common issue these days is disagreements on valuation between buyers and sellers. Sellers expect high valuations based on comps from previous years, but with rising interest rates and reduced access to debt financing, buyers are less inclined to pay high multiples. When sellers base multiples on projected EBITDA or revenue numbers, buyers are often unconvinced high growth is possible in the current market. One way they’ve managed to agree on terms is by structuring earnout or seller note agreements.

In this situation, a sponsor will buy the company for a lower valuation than the seller wants, but it will structure an agreement to pay the founders more money if they hit their projected growth targets in the next year or two, explains Brian

Crosby, managing partner at Traub Capital. His firm recently closed a deal for a consumer business, where Traub Capital structured an earnout agreement with the company. The earnout can be made as a cash payment to the founder or as a seller note—a loan that the seller provides to the buyer for deferred payments over time.

“We added a second unique component to the earnout, where the seller note will be subordinate to the equity coming into the business,” says Crosby. He adds that this structure makes lenders more comfortable, since they’d prefer that cash flow or new money coming into the business be used to reinvest in the company or pay down debt. “That’s why we made it a piece of seller paper,” Crosby says, noting that the company still has a conservative capital structure with 3x leverage. Traub Capital has used seller notes in three out of four deals in its new fund.

“You have to make sure you clearly define the earnout, and what has to be achieved and by when,” Crosby cautions. “You have to make sure there is no discrepancy in understanding what the goals are.”

RATCHETS

Another way for buyers and sellers to come to terms on valuation is by using a ratchet agreement. Unlike earnouts, which reward founders for hitting predefined financial goals, ratchets can create either a reward or a penalty for missing targets. “Essentially, it ties a piece of the deal price to future performance but allows for both sides to be incentivized by potential equity upside,” says Bobby Sheth, managing director at Salt Creek Capital.

“Say the company has a prediction for a future growth rate for revenue or EBITDA and really believes in that number,” Sheth says, and that the sponsor buys 70% of the business with the founder retaining a 30% stake. “If what you’re saying is true, then [the founder’s] ownership stays the same. If not, we ratchet the founder’s stake down to 15%, for example,” he explains. “It’s a way to let them bet on themselves.”

Sheth notes this approach usually works better with sizable, mature companies with at least $10 million in EBITDA. “It locks in a purchase price. If they hit their growth targets, then I’m paying this multiple. If not, I’m paying them a lower EV

(enterprise value),” he says. Salt Creek usually gives a company one or two years to achieve its growth targets.

Sheth’s firm used this arrangement with a specialty chemicals business, wherein Salt Creek’s minority position would become a majority stake if the company missed its numbers. “We’re typically majority owners, so we said, ‘If you don’t hit your numbers in year one or year two, our position would go to 60% ownership,’” Sheth says. The firm is currently looking at several other situations to factor in ratchets in buyout agreements.

MEZZANINE

Investors sometimes use mezzanine financing, a type of junior debt, as an alternative to equity or debt financing. Mezz acts as a high-yield loan that typically is less dilutive or expensive than equity but costlier than other types of debt. The loan is usually secured by a second lien on the assets of the company. Although it’s priced like junior debt, it sits between equity and senior debt in the capital stack.

Anne Vazquez, a general partner at NewSpring Capital who focuses on the firm’s mezzanine strategy, says her firm has been very busy assessing new investment opportunities. Companies are interested in mezz that can be used for a leveraged

buyout, debt restructuring, refinancing or growth capital. “When working directly with companies, there is an education component. No one wakes up one day and says they want expensive mezz debt,” Vazquez says. But the option is there for businesses that otherwise would be limited to dilutive equity, given the tight credit markets and slower M&A activity. “If you believe in the equity story and the company is growing, mezz can be a compelling growth lever for your business,” she says.

NewSpring recently invested in an electronics manufacturer that needed funding to support a strategic acquisition, where both the buyer and the target had experienced strong growth. The capital structure put 3x leverage on the company with 1x of that in mezz. “Now their focus will be on growth while integrating, and we can be the patient capital to help facilitate that growth,” Vazquez says. The deal closed in early July.

In some cases, implementing a mezzanine debt structure with a preferred equity component might work best so that leverage doesn’t go up as much, Vazquez says. To remain conservative in its underwriting, NewSpring recently worked on a capital structure that provided a $10 million growth investment, $8 million of which went to mezzanine and $2 million to preferred equity. That structure ensures the company isn’t over-levered, which could hinder its growth plans.

PREFERRED EQUITY

Like mezzanine, preferred equity also sits between the senior debt and equity of a company’s capital structure. It involves new equity interest in a company that technically falls in the junior debt category but has priority over common equity interests when it comes to paying out dividends.

Matt Shafer, head of direct private equity at Northleaf Capital Partners, says preferred equity is an option in this market, where interest expense can eat away at even strong companies’ cash flow. “The big issue is that the cost of debt increased enormously over the last two years,” Shafer says. “There are really good companies out there where leverage was arranged under different circumstances. The earnings and performance haven’t gone down, but it’s harder to find money to grow.”

If you believe in the equity story and the company is growing, mezz can be a compelling growth lever for your business.

ANNE VAZQUEZ General Partner, NewSpring Capital

That reality has created the need for alternative capital solutions that can be used to help a business grow, as in the case of a healthcare business that received preferred equity from Northleaf in March. A portfolio company of a brand-name sponsor that had double digit revenue growth, the business was healthy, according to Shafer. Yet high interest expenses were hindering its ability to pursue M&A. “There was everything good about that situation except that the company had too much debt to continue the acquisition growth strategy,” he says.

A benefit of preferred equity is that it does not put pressure on the cash flow of the business, Shafer notes. “But it’s cheaper than equity from the private equity fund that owns the company.” If the company’s existing sponsor has remaining LP capital, it usually wants to use it for other purposes, such as new deals. “Using someone else’s money that’s a little bit cheaper makes sense,” Shafer says. Preferred equity can also be a way to distribute capital to investors. Northleaf recently looked at a tech services company where proceeds would be used for a dividend recap to return some money to LPs.

CONTINUATION FUNDS AND NAV LENDING

Another way to return capital to LPs while giving sponsored companies more runway before an exit is through continuation funds.

While not a new concept, continuation funds have garnered more acceptance from the LP community in the last year or two. For funds that are nearing the end of their life cycle but need some time before exiting one or two final companies, continuation funds offer liquidity to some investors while rolling other LPs or new ones into a new fund that will house just one or two portfolio companies.

Northleaf’s Shafer says his firm’s secondaries business was an early adopter of continuation funds, and has invested in them since 2012. The investor community has become more open to this vehicle lately, especially since it usually means access to portfolio companies at lower valuations and favorable economics, with lower fund management fees and a tiered carry structure. “LPs have become more accepting, though they viewed it as a negative 10 years ago,” Shafer says. He adds that

RAFAEL CASTRO Partner, Hark Capital

they recognize the structure could be better than selling assets amid unfavorable market conditions.

NAV lending is another option for fund managers that want to extend the runway for a handful of remaining companies. A NAV loan is backed by the unrealized value of the private equity fund. Like continuation funds, NAV loans have been around for years but have garnered more acceptance recently as market conditions became choppier.

Compared with a continuation fund, a NAV loan is a simpler, more focused solution that can be completed in four to six weeks, according to Rafael Castro, partner at Hark Capital, a NAV loan provider. “The difference between a NAV loan and a continuation fund is like the difference between a Band-Aid and surgery,” he says. On the other hand, if the GP needs a greater amount of capital and some of the existing investors want to realize their stakes while others want to “roll,” the continuation fund could make more sense.

Before providing a NAV loan, Hark Capital looks at the remaining assets in the portfolio and determines the loan-to-value ratio of its loan relative to the value of the portfolio. When performing the analysis, the firm likes to see diversification: at least four or five companies that are “viable names” with a defensible strategy.

Castro thinks about downside protection in terms of both coverage and diversification. If there are several good names in the portfolio, one potential write-off among several good performers will still allow the NAV lender to be repaid upon exits of other portfolio companies. “We can be particularly helpful in situations where the alternative cost of capital is equity. If you compare our cost of capital to the real economic cost of bringing in dilutive equity, I think we’re an attractive option,” Castro says.

As a case study, last year Hark Capital lent $50 million to a $400 million fund that needed capital to pay off a senior debt facility at one company and finance add-on acquisitions at another. The remaining assets in the fund were diversified across multiple portfolio companies and industries, including industrials, business services and consumer, Castro says.

When it comes to fund finance solutions, Castro and Shafer think NAV lending and continuation funds could become a permanent fixture of the investment landscape. Whereas in the past, using a continuation fund or a NAV loan could be seen as negative or signal that the remaining assets were impaired, now it means something different. The assets are likely healthy but need more runway because of high interest rates and lower valuation expectations.

“A few years ago, maybe there was a little bit of a stigma among GPs driven by a misunderstanding of [NAV loans]. Now we’re starting to see that thaw. We’re starting to see more people in private equity embrace this as a solution,” says Castro.

Continuation funds have also gained more acceptance in recent years because of market conditions and new governance aspects. The Institutional Limited Partners Association published new guidelines on continuation funds in the summer.

“It went from being the assets that didn’t work being sold at very mediocre prices to being the assets that did work being sold at very good prices,” says Shafer. “The outcome to limited partners who chose to sell into these deals became a positive outcome.” //

ANASTASIA DONDE is Middle Market Growth’s senior editor.

The difference between a NAV loan and a continuation fund is like the difference between a Band-Aid and surgery.

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The Wrap-Up

ACG EVENTS

[DealMAX] is a place where you have over 3,000 of the intermediaries and people that you work with. You're talking deals, you're

Development,

talking business, but you're also having a lot of fun.

Stephanie Mooney Director of Business

Trivest Partners

ACG Events

DEALMAX

In a gathering of about 3,000 attendees, DealMAX took center stage May 8-10 at the ARIA Resort and Casino in Las Vegas.

ACG’s annual conference, formerly known as InterGrowth, featured a host of new programming additions, including dedicated forums tailored to attendees’ specific interests and expertise, thought-provoking panel discussions and interactive sessions with industry leaders, allowing for in-depth networking opportunities.

One of the highlights was the DealMaker Invitational golf outing at the Cascata Golf Club.

DealMAX also included a presentation of the firstever MAX Awards. The Riverside Company received the Private Equity Firm of the Year Award, Houlihan Lokey received the Investment Bank of the Year Award, and PNC Bank received the Lender of the Year Award.

Robert Landis, founding partner, origination, for The Riverside Company, received the ACG Legend Award.

DealMAX will return to the ARIA in Las Vegas on April 29-May 1, 2024.

10TH ANNUAL WOMEN OF LEADERSHIP SUMMIT

On April 19, over 250 middle-market professionals came together for a day filled with inspiring discussions and opportunities to connect with others at the 10th Annual Women of Leadership Summit in New York.

The daylong event was packed with networking opportunities, speaker presentations and panel discussions.

Anne Clarke Wolff, founder and CEO of Independence Point Advisors, delivered the keynote address, setting the tone for the event’s agenda of recognizing and fostering female leadership in the investment industry.

The summit ended with a happy hour, followed by the Women of Leadership Soiree – Culinary Masterclass.

ACG MID-SOUTH CAPITAL CONNECTION

The ACG Mid-South Capital Connection event, hosted by ACG Kentucky and ACG Tennessee, was held June 14-16 at the Omni Louisville Hotel in Louisville, Kentucky. The conference brought together over 300 private equity investors, mezzanine lenders, investment bankers, service providers and corporate executives from across the country. The event featured unique networking experiences that showcased the flavor and heritage of Derby City. Attendees were immersed in the rich atmosphere of Louisville, a city known for the "Business of Bourbonism."

Expert panels offered insights and knowledge on pertinent topics. Industry experts led discussions on trends, challenges and opportunities in the market, providing attendees with valuable perspectives and actionable strategies.

DEALFEST NORTHEAST

ACG Boston’s DealFest Northeast kicked off on June 22 at the Boston Convention and Exhibition Center. This middle-market M&A event brought together more than 750 capital providers, intermediaries and deal advisors from across the country for a packed day of networking and deal exploration.

Highlights included DealSource—one-onone meetings between an exclusive group of private equity, investment banking, lending and corporate development professionals—as well as the Women’s Connection Luncheon, Family Office Roundtable and DealFest networking reception, where New England’s top private equity and investment banking firms hosted and served craft beers, cocktails and wine.

The Young Professionals Reception rounded out the day at The Sporting Club in Boston.

2023 FAMILY OFFICE AND INDEPENDENT SPONSOR DEALSOURCE

The Ritz-Carlton in Dallas was the center of high-profile dealmaking as it hosted the 2023 Family Office and Independent Sponsor DealSource event in April.

Presented by ACG Dallas/Fort Worth, the gathering— exclusive to family offices and independent sponsors— brought together industry leaders from across North America for a day of one-on-one meetings.

Sponsored by WhiteHorse Capital and law firm Carrington Coleman, the event was designed to foster collaboration and explore investment opportunities through strategic partnerships.

2023 TRANSACTION SOLUTIONS SYMPOSIUM

ACG LA hosted the second Transaction Solutions Symposium on June 22 at The Maybourne Beverly Hills. The event brought together industry leaders who shed light on the latest trends and strategic aspects impacting mergers and acquisitions and transactional risks.

Topics at the symposium included representations and warranties claims and tax liabilities. Experts at the event discussed their experiences navigating such claims and shared insights to help attendees better understand this aspect of M&A transactions.

The event also covered the field of tech M&A, examining the unique challenges and opportunities that technology-driven deals present. It also featured indepth discussions on healthcare M&A, delving into the specific nuances of transactions in this sector.

ACG SOUTHEAST REGION DEALSCHOOL

Presented by ACG National Capital and ACG Maryland, the ACG Southeast Region DealSchool kicked off on June 15 at the MGM National Harbor in Oxon Hill, Maryland.

The event brought together about 35 middle-market professionals from across the region, offering exclusive opportunities to connect, learn and navigate the intricate components of the deal life cycle.

Attendees engaged in interactive sessions, workshops and discussions, where they delved into key aspects of dealmaking, including valuation, due diligence, financing strategies, negotiations and post-merger integration.

As part of the program, DealSchool offered an evening social outing at Topgolf, where attendees enjoyed friendly competition, networking and dinner.

DealSchool also held chapter activities, allowing for even more professional development.

Upcoming ACG Events

• SEPTEMBER 20: Capital Connection & Wine Tasting –ACG Kansas City

• SEPTEMBER 21: NextGen Fall Fete – ACG Los Angeles

• SEPTEMBER 28: Aerospace & Defense Middle Market Leadership Forum – ACG Los Angeles

• OCTOBER 2-3: M&A East – ACG Philadelphia

• OCTOBER 5: ACG PE Forum – ACG Chicago

• OCTOBER 6: Second Annual Industry Fall Golf Outing – ACG Orlando

• OCTOBER 13: Young Professionals Volunteer Event: Food for Thought – ACG Denver

• OCTOBER 16: Golf Outing at River Creek – ACG National Capital

• OCTOBER 19: Women Connect Pickleball Mixer – ACG South Florida

• OCTOBER 24: Dealmakers’ Forum – ACG Denver

• OCTOBER 25-26: Midwest Capital Connection – ACG Chicago

• NOVEMBER 9: 8th Annual Stars of the 101 Gala – ACG 101 Corridor

ACG ANNUAL BUSINESS AWARDS

ACG Orange County in May recognized the region’s exceptional middle-market companies at the 28th Annual ACG Awards. The annual event spotlights innovative organizations driving growth and job creation.

This year’s celebration took place at the Hotel Irvine in Irvine, California, and drew about 500 executives and professionals.

Companies that received top honors in this year’s competition included Profit Recovery Partners, in the Corporate Responsibility category; Harvest Landscape Enterprises, in the Emerging Growth category; Boudreau Pipeline Corp., in the Founders category; MP Biomedicals, in the Global category; IHI Power Services Corp., in the Green/Sustainability category; TrafFix Devices, in the Innovation category; Spec Formliners, in the Reinventing category; Zone 4, in the Spotlight category; Global Telecom, in the Start-Up category; and Technologen, in the Sustained Growth category.

M&A WEST

M&A West, hosted by ACG San Francisco, concluded on a high note after three days of networking, insightful panels and dealmaking activities at the Meritage Resort in Napa Valley.

From May 31-June 2, about 300 dealmakers representing 28 ACG chapters gathered to explore opportunities, connect with industry experts and immerse themselves in the vibrant wine region.

The conference kicked off on May 31 with preconference activities, including a golf session exclusively available to a select group of participants at the Silverado Country Club.

On June 1, the morning began with the Vineyard Walk, and the conference concluded on June 2 with a memorable wine-tasting experience featuring the best of Napa Valley.

For a complete list of upcoming events, visit acg.org/events.

THE STRATEGIC IMPERATIVE: The Value of a Programmatic Approach to

Cybersecurity in Private Equity

Key Takeaways:

• Growing cyber threats pose risks to businesses. Private equity firms and their portfolio companies acknowledge the need for stronger cybersecurity and compliance programs.

• Ad hoc cybersecurity measures in private equity are no longer enough. The patchwork approach lacks a proactive strategy, resulting in fragmented defenses, gaps, vulnerabilities, and inadequate response capabilities.

• Hiring a reputable firm to lead a programmatic cybersecurity and compliance program for private equity offers tangible benefits: risk reduction, improved efficiency, and increased stakeholder confidence.

• Implementing a programmatic approach to cybersecurity and compliance generates value throughout the dealmaking process, ensuring long-term value retention and growth for portfolio companies while safeguarding investor interests

Introduction

Private equity firms and their portfolio companies face escalating cybersecurity threats, which can lead to financial losses, reputational damage, and legal ramifications. This article examines the benefits of adopting a programmatic approach to cybersecurity and compliance, as well as the advantages of engaging a reputable firm to manage comprehensive programs in these areas. It highlights how such an approach adds value by effectively mitigating risks and fostering sustainable growth.

Risk Mitigation

Engaging a reputable firm to run a holistic cybersecurity and compliance program significantly reduces the likelihood and impact of cyber incidents. Statistics show that organizations with mature cybersecurity programs experience 12 times fewer breaches and save over $1.5 million compared to those with less mature programs (Ponemon Institute, 2021). By implementing robust risk management strategies, firms can proactively identify vulnerabilities, prevent breaches, and minimize potential damage.

Operational Efficiency

Comprehensive cybersecurity and compliance programs optimize operational efficiency for portfolio companies. Integrated cybersecurity strategies reduce incident response time and costs. Accenture’s study shows that investing in cybersecurity and privacy capabilities yields a 40% higher ROI on technology investments. Engaging cybersecurity expertise and leveraging advanced technologies enhance operational resilience and facilitate seamless business operations for reputable private equity firms.

Stakeholder Confidence

Maintaining stakeholder trust is crucial for private equity firms and their portfolio companies. Engaging a reputable cybersecurity and compliance firm demonstrates commitment to safeguarding sensitive information and regulatory compliance. Deloitte’s survey shows that 82% of customers prefer vendors with strong data protection practices. Prioritizing cybersecurity and compliance attracts and retains clients, investors, and partners who prioritize data security.

Value Creation, Retention, and Protection

Private equity must prioritize cybersecurity and compliance for long-term value creation, retention, and growth. Studies demonstrate that strong cybersecurity practices lead to financial outperformance (Harvard Business Review, 2019), protecting intellectual property, reputation, and establishing a competitive edge. Adhering to industry regulations through robust programs safeguards against penalties, preserves market position, and ensures investor value protection.

Why Abacode Cybersecurity and Compliance?

As ACG’s endorsed partner for cybersecurity and compliance, Abacode offers unparalleled expertise in the field. With their ability to quarterback your cybersecurity and compliance program, Abacode provides comprehensive solutions to safeguard your organization from cyber threats and ensure regulatory compliance. Beginning with M&A due diligence and continuing through the lifespan of your portfolio company investments, Abacode’s record and industryleading capabilities make us the trusted partner to navigate the complexities of cybersecurity and compliance with confidence.

Abacode – Your Cybersecurity Quarterback

Engaging a proven firm like Abacode for a holistic cybersecurity and compliance program is invaluable. Their programmatic approach mitigates risks, enhances efficiency, builds stakeholder confidence, and creates long-term value. In today’s evolving cyber-threat landscape, proactive investment in cybersecurity becomes essential for navigating the digital age successfully. Contact Abacode now for a transformative cybersecurity journey.

To learn more about how Abacode helps private equity firms increase investor confidence, contact:

Mark Harless Partner Alliance Executive Abacode Cybersecurity & Compliance mark.harless@abacode.com

Private equity must prioritize cybersecurity and compliance for long-term value creation, retention, and growth.

TAKEAWAYS Key

BORROWER BEWARE

GF Data, an ACG company that tracks private M&A transactions, found that the interest rate on senior debt in the first quarter reached its highest level since early 2007. Based on data collected from its private equity contributors, GF reported that average senior debt pricing shot to 8.1% in Q1, up from 6.9% in the fourth quarter of 2022. “Costly Capital,” p. 34.

WAITING GAME

Market uncertainty is prompting some businesses to take a wait-and-see approach to selling, opting instead for alternative forms of financing. VSS Capital Managing Partner Jeffrey Stevenson says he’s seeing companies pursue structured capital solutions in lieu of an outright sale to avoid ceding control. “Signs of Life,” p. 40

4

3 1 2

BUYING AI

A bright spot against a dim M&A backdrop this year has been acquisitions tied to artificial intelligence. Global M&A volume was down 48% in the first quarter compared with a year prior, while AI-related deals were down only 7%, according to Dealogic and GlobalData. “AI—The Future of M&A,” p. 14.

COMPLIANCE COMPLEXITIES POWER INVESTMENT

The environmental, power and infrastructure services subsector has created an opportunity to partner with solutions providers, thanks to various trends in the space, writes a partner at Ridgemont Equity Partners. One such trend is the need to abide by increasing compliance requirements, which is prompting asset owners and operators to turn to outsourced service providers with specialized capabilities and expertise. “The Interconnected Ecosystem of Environmental, Power and Infrastructure Services,” p. 12.

5

CLOSING TIME

The clock is ticking on many private equity holdings, leading to predictions that the third and fourth quarters will see heightened deal activity as PE owners look to exit their positions, regardless of whether broader economic conditions improve. That could prove welcome news to limited partners, many of whom are feeling the liquidity pinch. “Dry Powder Reserves Point to Insatiable Buyout Demand,” p. 16.

CATCH UP QUICK: From signs of continuing uncertainty in the market to sectors of opportunity, here are some of the highlights from this edition of DealMaker.

Norton Rose Fulbright brings together broad geographical experience with deep industry knowledge to provide strategic, business-oriented legal advice on complex domestic, cross-border and multijurisdictional corporate and M&A transactions. Our team advises clients on the full range of transactional, regulatory and contentious matters. This means, we can help you make your next move with confidence.

Where complex transactions require a confident approach, we’re there.

STRATEGY OVERVIEW

PENINSULA CAPITAL PARTNERS IS A ONE-STOP PROVIDER OF JUNIOR CAPITAL WITH THE CAPABILITY, FLEXIBILITY AND COMPETENCE TO ADDRESS ANY TRANSACTIONAL FINANCING NEED VIA SUBORDINATED DEBT, PREFERRED EQUITY AND/OR COMMON EQUITY. WE SPECIALIZE IN NON-SPONSORED, CO-SPONSORED AND COMPANY-DIRECTED INVESTMENT SITUATIONS REQUIRING TAILORED JUNIOR CAPITAL SOLUTIONS, EITHER AS A NON-CONTROLLING OR CONTROLLING INVESTOR. WE SEEK TO CREATE A CUSTOMIZED AND UNIQUE CAPITAL SOLUTION FOR EACH COMPANY INTO WHICH WE INVEST IN ORDER TO MAXIMIZE THE OPPORTUNITY FOR SHARED SUCCESS.

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