With all the mega-LBO activity of late, it’s sometimes easy to forget that the most transactional action remains in the middle-markets (redefined as deals between $50 million and $1 billion). So let’s play 5 Questions with Randal Stephenson, head of middle-market M&A at CIT Group:
1. Private equity deals are making up an ever-larger piece of the overall M&A pie, with estimates that they will represent over 20% of 2006 transactional value. Are middle-market deals contributing to this, or is it simply being skewed because of the multi-billion dollar mega-buyouts?
There are two ways to look at M&A figures: One is to look at dollar volume, and the other is to look at the actual number of deals. In terms of dollars, yes, the big deals like HCA are certainly driving the numbers. And I’d expect that to continue for a while, because these big private equity firms – not to mention the $1.3 trillion in hedge fund assets under management – have capital that needs to be put to work.
But middle-market deals are still the vast majority of the number of deals getting done, and I expect that it will remain that way. In that sense, the big deals like HCA are kind of aberrations when you look at the entire M&A universe.
2. You mentioned hedge funds. For the past two years, buyout firms have been expressing fear that hedge funds will begin competing for “private equity” deals. Have you seen that happen?
We have. What is so attractive about the hedge fund model is that it’s short-term money, as opposed to the four or five years that private equity funds hold a deal. This gives hedge funds far more flexibility when approaching a transaction. They can do equity, or do debt, or do mezzanine… they simply have a lot of different possible angles.
3. From a client advisory point-of-view, is the short-term issue problematic?
Every situation is different. If you have an entrepreneur who wants their son or daughter to take over as CEO, then that’s a customer that might care about the hedge fund’s short-term outlook. But if it’s a private equity firm selling, what they really want is the highest return on their investment. They will be relatively indifferent to the company’s long-term future, because their fiduciary duty is to their limited partners.
4. The recent buyout boom is partially being driven by easy access to the debt markets. Given that you see a lot of lenders each day at CIT, you might be in a good position to answer the following question: Are lenders perpetually drunk?
No, not drunk. Aggressive maybe, but leverage multiples were crazier a couple of decades ago…
Part of your question is to the sustainability of this lending environment, assuming that interest rates don’t move too much and that there are no major world events that create an economic shock. I think it is sustainable in general, although I’m not sure that the market can handle a large number of additional mega-debt syndications like HCA. The only thing can could really slow things down would be if we see significant defaults.
5. You have lots of things on the wall next to your desk, including a clipping about “Sales Lessons” from Arnold Schwarzenegger. What is Arnold’s most salient lesson?
Uh oh… First, this has nothing to do with politics. You’ll also see something from Bill Clinton up there. But the compelling thing about Schwarzenegger has been his ability to identify an opportunity – whether it be in film, body-building or politics – then marshal the resources to drive it forward in an aggressive and almost single-minded manner. I think that’s what a lot of the best people on Wall Street do.