This market is busier than ever. What’s driving the deals these days?
For us, it’s not the market driving things; it’s the opportunities we’re seeing. We believe if you see good deals you close them, regardless of overall market activity. Conversely, if we don’t see good deals, we don’t force it. Over the past few months we have seen a couple of excellent platforms and it made sense to buy them whether the overall M&A market was good or bad. And, although no doubt the financing market is frothy, we would have done the deals we’ve done if the financing market was not so hot and simply equitized them more. And to get deals done in any market our philosophy is to pay a full and fair price, while avoiding overpaying.
Where are you finding your deals?
It’s true that proprietary platforms are rare, and that almost all sizable companies go through a process of some sort. On proprietary platforms, you still need to have some advisor for the seller to get the deal done and give the seller comfort that they are receiving a fair price and market terms. The biggest trick with proprietary deals is not finding someone before they speak with an advisor-this is somewhat easier than many people think-it’s getting them to sell the company without a process. Companies need a compelling reason not to run a process.
A record-breaking number of funds headed to the market in the first quarter. Is there enough deal flow for everyone or do you think we are going to wind up with an even larger overhang in the market?
Obviously, a significant amount of capital will be raised for funds this year. And, correspondingly I believe there will be an overhang. In most markets, you tend to get the most money in the market at the top. Look at the leveraged lending market, lenders are typically too aggressive at the top. Some of the companies that are leveraged are going to have issues with supporting their leverage down the road after the economy cools and interest rates rise. We know there is going to be a correction at some point in the leveraged lending market. As my partner Mike Moran says, We all know how this movie ends, it’s just a question of when.’ Mike’s right. We do know the financial markets are cyclical, whether for leveraged lending, for acquisition multiples or for fundraising.
Any idea when the markets will cool down?
I don’t know exactly when, but with interest rates going up and the economy eventually slowing, it will occur. The trick for us is to not get caught up in the hype. While we’re doing deals, and paying full prices for those we do, it’s important for us to have a broader perspective and to be careful. Nothing lasts forever.
What is going on with the exit opportunities these days?
We have almost fully exited out of Fund I. We’ve had a very successful run with Fund I which was invested in the difficult era of 1998 to 2001. We sought out companies that we could aggressively build with management and had the objective to make these companies more sophisticated and diversified – so that when it was time to sell we were selling a much different asset than we had bought. That approach worked out great. That’s what we believe we still need to do today – build real value that transcends market cycles. We believe that’s an approach that never should go out of style.