We sat down with Joe Statter, President and Managing Director of Evergreen Advisors Capital (EAC) to ask a few questions about M&A activity in the private sector and what 2016 is shaping up to look like so far.
1. How has the year 2015 been for you and EAC in terms of middle market activity?
2015 was a great year. We closed 6 deals and we are currently executing 14 client engagements – 9 M&A assignments and 5 capital raise assignments. Of the 9 active M&A engagements, 2 are now under letter of intent.
2. What are the biggest factors driving M&A, and therefore, causing companies to reach out to Evergreen Advisors Capital?
There are three macro drivers making this a great time to be a seller:
One: The overall economy is only growing at a 2% pace, forcing companies to pursue an inorganic or growth-by-acquisition strategy. Slow growth has been pulling more strategic acquirers into the market.
Two: There is a lot of debt and equity capital available. Cheap debt and equity make acquisitions less dilutive to the buyer. Middle market buyout funds are sitting on over $360 billion of dry powder and S&P 500 companies control over $2.2 trillion of cash.
Three: Drivers one and two above are driving purchase multiples higher – business owners who are considering a sale know that we are in a very favorable part of the cycle, giving them confidence to go enter the market.
- What trends did you see in capital raise and M&A in 2015?
We saw private rounds get larger and higher valuations in the private capital markets, due to the IPO market demanding more mature, proven companies.
As I mentioned earlier, strategic/corporate buyers were more active in 2015, continuing the trend from the back half of 2014. Growth is tough to come by and when you also have access to cheap debt, corporate buyers have been enabled to pay up.
Another dynamic we have been seeing in the middle market is sponsor-backed companies aggressively pursuing add-on acquisitions to reduce/average-down the higher multiples they paid for platform companies. Two of the M&A deals we completed in 2015 were acquired by private companies backed by financial sponsors.
- What kind of activity are you expecting for 2016? How do you view the upcoming activity being different than that of M&A in 2015?
Moving into 2016, I believe we will see more proactive sponsor-backed add-on acquisition activity as corporate/strategic buyers drive up purchase multiples for platform companies. One way middle market buyout funds will combat this dynamic will be by simultaneous add-ons occurring with initial platform acquisitions to reduce the overall purchase multiple, quickly adding scale and customer diversity, and enabling them to negotiate better debt terms, potentially using a greater proportion of debt financing in these initial deals to help drive their returns on equity.
Another trend we have been seeing, that I think will continue in 2016, is middle market private equity funds playing the role of growth equity investor. In other words, relaxing their control requirement and acquiring significant minority equity stakes in private companies.
A macro trend is that baby-boomer-owned middle market businesses are going to continue to drive activity. There are approximately 800,000 companies with revenues between $1 million and $1 billion that are owned by “boomers.” Middle market private equity funds will see a lot of these opportunities.
5. What makes companies reach out for advisory services in transactions such as those offered by EAC?
Experience. For most of our clients, the biggest economic opportunity of their life is the business they have built and grown over the years, and this is the first time they will be faced with monetizing it as an asset. Selling businesses and raising capital is what we do for a living, and our clients are seeking to leverage our experience and judgment in these situations. Having an advisor who has executed a lot of transactions in both good and challenging market conditions can make a huge difference in the outcome to that entrepreneur. Also, whether it is an outright sale of the business or raising capital to grow the business, companies and their owners hire us to enhance market access – to see more alternatives for their company.
In many cases, the transaction the client thought they would execute may not be the deal that accomplishes their goals. One example is a client who really wanted liquidity, and thought the only way to get that liquidity was to sell their business. We ended up helping the client sell a minority stake to an institutional investor. Almost all of the proceeds from the transaction went to shareholder liquidity, and the client still controlled their business.
6. What advice would you give to companies who are considering private placement deals?
Make sure your financial house is in order. Historical financial statements, financial projections, cap table, accountants’ reports, internal budgets, tax returns, bank compliance certificates, etc. must all be available and organized.
Get any corporate housekeeping needed taken care of prior to speaking with investors. This means making sure all of your existing shareholder or LLC agreements are executed, all equity holders are properly accounted for, certificate of incorporation is effective, and all option or warrant agreements are executed and accessible.
Be realistic about valuation and structure.
Make sure you are accessing the type of investor that is appropriate for your business at its particular stage of development = angels, family offices, venture capital funds, growth equity funds, etc.
Joe Statter is the President and Managing Director of Evergreen Advisors Capital (EAC). He oversees the DC Metro Area Office of Evergreen Advisors in Tysons Corner. Joe’s expertise spans multiple industries and stages of company development, and he has executed a broad spectrum of transactions including: mergers and acquisitions, private placements of debt and equity, convertible and high yield debt, IPOs and follow on equity offerings, and restructuring/bankruptcy advisory engagements. He has 27 years of experience in investment banking, principal investing, financial management, and public accounting.