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Advisors, Private Equity

Mid-Market Dealmaking Will Go On Despite Stock Unrest


Mid-market M&A is expected to continue churning out deals despite the current market volatility caused by global concerns over China’s slackened economy.

Investors who have previously experienced losses may be wary. But according to Gary Ampulski, a managing partner at Midwest Genesis, “Many investment and wealth management professionals have told investors not to panic. The market’s fundamentals seem to remain good and signs point to the fact that this is a normal correction of stock prices.”

For smaller-cap and mid-market dealmakers, it should be business as usual for as long as current economic conditions remain positive. “We haven’t had a market correction, even a smaller one, in years and this might just be a pent-up correction. As long as it doesn’t affect the real economy, this will not have a dramatic effect on the mid-market and will just play itself out,” said Neil Wessan, managing director and group head at CIT Capital Markets.

The current turmoil might even lead to increased deal activity for strategic buyers that have a need for growth, as well as private equity funds. “If the level of volatility continues, private equity portfolios might be diminished because the IPO market might not be open for exits,” Wessan said. “These firms might look into outright sales or recapitalizations, which is probably an opportunity for more M&A transactions to occur.”

Additionally, deals in the private sector can often remain impervious to market conditions. This is the case for lower mid-market private equity firm Yenni Capital. “Our private equity fund’s performance is not really market-driven. We buy using low-leverage private companies that continue to experience EBITDA growth despite market fluctuations,” said president and founder Musa Yenni.

However, some highly leveraged companies might be affected in a sustained downturn. These firms might “experience EBITDA declines that might cause [them] to violate bank covenants,” Yenni says. “We might see more of that.”

Lessons from the Past

Even if history is used as a guide, signs seem to point to a better experience this time around. According to Robert Profusek, a partner at Jones Day, although M&A essentially ground to a halt after the attacks of September 11, 2001 and the Lehman Brothers bankruptcy in 2008, these incidents were mostly caused by the resultant recessions and dramatic pullbacks in the financing markets.

Today’s market seems more similar to the stock market crash in 1987. What followed this crash was an avalanche of mostly unabated hostile takeover activity that lasted through the early 1990s recession. “In my view, even though sellers are obviously going to be less willing, continued activity is much more likely than a significant M&A pull back — particularly because corporates continue to be so underleveraged, private equity firms have so much dry powder, and financing is so plentiful,” Profusek said. In the short term, there might be a pause as a “new normal” is established. “But the short term is likely to be, well, short.”

Money Talks

Despite the recent instability, dealmakers can still rely on steady financing to support strong deal flow. Current market conditions should not stop the influx of capital into mid-market transactions. “Financing will be resilient since lenders have money at hand,” said Sage Harrison, a principal at Evolve Capital. “There could be challenges for those raising a fund if this instability is extended, but most financing sources are just trying to find worthwhile deals. It is going to take a prolonged downturn to hit lower mid-market M&A with so much money trying to be deployed.”

Further easing access to deal financing, favorable rates might be here to stay for now. Yenni Capital’s Yenni predicts the market downturn will result in the Federal Reserve holding back on raising rates, since slower global growth would argue for a continuation of a zero- to low-interest rate environment for the foreseeable future. “That’s a positive for M&A private equity transactions and financings.”

A Time to Sell

Despite expectations for continued robust activity and deal financing, one downside is that the current market volatility might cause business owners to feel uncertainty and to extend the ownership of their businesses.

“Business owners, while high risk takers in running their companies, tend to be very conservative when it comes to managing their own assets,” said Midwest Genesis’ Ampulski.

However, staying on the sidelines might not be the best decision. “For those owners who have been sitting on the fence for awhile, we have been telling them that they have to decide now or the timing might not be in their favor later,” he said. Market cycles are fairly predictable. The current seller cycle has lasted for two years, suggesting that there might be a year and a half left. Given that it usually takes 12 months to complete a sales process, this would leave owners with only six months to make a decision.

The time to act is now, says Ampulski. “Sellers need to get moving quickly based on past economic cycles. These favorable market conditions are not going to last forever and they might miss the window of opportunity if they wait.”


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