1.What’s the financing environment like right now?
It Stinks. The market place is very competitive. My partners and I have been through a few cycles now and have learned how to adjust to the changing capital markets. There’s more and more capital attracted to each deal. Prior to the current market situation, we might have one or two competitors per deal; we easily have five or six in this environment.
In addition to having an affect on returns, the competition also increases multiples. For larger transactions we are seeing multiples up to 5.5x EBITDA through the sub-debt and for smaller transactions we are seeing multiples below 4.25x EBITDA.
The expansion in senior debt appetite by the banks and financial intuitions coupled with the large amount of private equity fund dollars being put to work also has led to higher sub-debt multiples.
The private equity firms are pleased from a financing standpoint!
2 What does it take to win deals in this environment?
Competitive financing packages are a must. We do not win deals on our good looks or height. Greyrock tries to utilize its direct or indirect experience in an industry segment or with a management team to add value to the package when ever we can.
3. What sorts of deals have you been looking at recently?
Deal flow has been strong in the last few months in each of our offices. The types of deals and industries tend to vary depending on geography (Chicago, Connecticut and San Francisco). We have been seeing and currently investing in a broad set of companies across many industries in the economy: home construction related, branded and unbranded food manufacturers, value added distributors, logistics, service businesses, companies supporting infrastructure build up and metal manufacturers or foundries).
We are primarily working on sponsor led buyouts; however we have also seen or worked on a few unfunded sponsor deals, growth capital financings and leverage recaps.
4. How has the presence of hedge funds affected your overall investment strategy?
It’s had no effect on our investing strategy. Greyrock is focused on individual middle market businesses whose management teams have developed strong competitive advantages and good prospects for sustainable cash flow in the future. As I mentioned above, the amount of capital in the market place has certainly changed the risk adjusted return for the asset class as a whole.
We target transactions with companies that have EBITDA under $10 million; consequently we don’t see hedge funds as direct competitors.
This has resulted in some of the traditional mezzanine players focused on companies with EBITDA above $10 million coming down into our market segment. We continue to be optimistic at being able to meet our investors’ expectations for returns. The length of this competitive situation and the ultimate exits in the future will determine our success.
5. What should we expect in the next 12 months?
My partners and I talk about this every week. Absent a recession, we expect competitive market dynamics from the continued abundance of capital.