PE Hub’s ongoing Q&A series with private equity leaders reflecting on highlights from 2022 and sharing their outlooks for 2023 continues now with Brad Bernstein, managing partner, FTV Capital. With offices in San Francisco, New York and Connecticut, FTV is a growth equity firm that invests in enterprise technology and services; financial services; and payments and transaction processing. For example, FTV invested $180 million in LogicSource, a provider of procurement services and technology, back in April. Other 2022 investments include Zoovu, Patra and ConnexPay.
What were the highlights of your dealmaking in 2022?
Despite ongoing uncertainty in the macro environment, FTV had a very active 2022. At the beginning of the year, we raised $2.3 billion for our seventh and largest fund to date. We then deployed $975 million over nine new investments plus follow-on rounds, all due to our robust sourcing model, thematic focus and practice of building long-term relationships with management teams well in advance of a transaction.
One specific highlight: we’ve invested in numerous tech-enabled services businesses and for several years have been interested in tech-enabled sourcing and procurement solutions. As we suddenly found ourselves in a world facing major supply chain constraints and soaring inflation earlier this year, we were proud to make a $180 million investment in LogicSource, one of our largest investments to date. We’ve long believed that procurement is the final frontier of outsourcing and a key lever for businesses to increase profitability.
What was the biggest challenge to completing deals in 2022?
One of the greatest challenges of the past year has been bridging value with counterparties as markets were dropping precipitously. Coming off the sky-high valuations we saw over the last few years, and especially at the tail end of 2021, many founders have had a hard time coming to grips with the new reality of less exuberant valuations. Fortunately, at FTV, we have always been conscientious about valuation discipline and strive to achieve fair prices, which means we tend to partner with mature founders who understand the importance of rational exit underwriting for the long term.
How do you expect the first six months of PE dealmaking in 2023 to compare with the last six months of dealmaking in 2022?
Compared to the last six months of 2022, we expect market participants to adjust to the post-bubble environment as markets stabilize and recession fears catalyze funding needs. Given the likelihood of a recession in 2023, it will be important to have a disciplined approach amid a continued challenging macro backdrop.
What will be the most important trends affecting your dealmaking in 2023?
We remain focused on identifying high-caliber companies with the ability to endure market cycles due to robust financial profiles, predictable revenue models, mission-critical value propositions and highly motivated management teams. Heading into 2023, we’ll put even greater emphasis on profitability and recession resistance in our underwriting and continue to seek risk-adjusted returns through modest leverage and senior securities with strong downside protection.
What’s keeping you up at night?
While it’s likely the Fed will overshoot on interest rates, it remains to be seen how aggressive it will be in fighting inflation and thus how severe the market downturn will be. We have to be prepared for a range of scenarios; as we repeatedly remind our portfolio CEOs in planning and forecasting, “hope for the best, but prepare for the worst.”
What are you looking forward to most in 2023?
I’m most excited for FTV’s 25th anniversary, which we’ll be celebrating throughout 2023. I can’t wait to come together with our FTV team and external stakeholders to celebrate this milestone.
I’m also looking forward to working closely with our portfolio companies to execute through what will likely be a tough market environment and come out even stronger on the other side. Throughout our history, we’ve weathered a number of down markets, and it’s always gratifying when we can leverage our time-tested growth equity model and value creation platform to continue driving growth for our portfolio companies and generate great outcomes despite economic headwinds. Our hope is that by the end of next year, inflation will be tamed, enabling markets to stabilize and encouraging capital to return from the sideline.