Good morning Hubsters, Craig McGlashan here with the Tuesday Wire.
The cost of debt is still pushing GPs to focus on their existing investments, through operational improvements and add-ons. This morning, Chris Witkowsky reports that there is still a “fertile environment for add-ons,” as he writes about Gallant Capital, an emerging manager that has plans to combine two IT services businesses.
Giving further credence to that theme, Osceola Capital this morning announced the completion of four add-ons for its sales and marketing platform company.
We then wrap up with a look at Align Capital Partners making an investment in a security, medical and travel-related service provider.
Add-on and on and on
GPs are still finding a “fertile environment for add-ons,” sources told Chris Witkowsky, including Gallant Capital, an emerging manager raising its second fund that the sources said is combining two IT services companies into a single platform.
Despite the Fed only raising rates at 25bp intervals this year – compared to the 75bp jumps common in 2022 – the cost of debt is still leading to a tighter M&A market where GPs are having to find creative ways to build platforms with an eye toward cost, Chris wrote. The common wisdom is that those firms that can improve operations, rather than simply rely on rising markets and cheap debt, will have an advantage through the uncertainty.
Gallant appears to be leaning on its operations focus in the transaction. The deal, which the firm is expected to announce soon, is the first out of Gallant’s Fund II, which has been in the market since last year targeting $600 million, sources said. The price tag on the deal was in the range of $150 million to $175 million, the sources said.
The two companies are IT services and products provider DynTek, based in California, and Canadian business rSolutions, which provides cybersecurity services for businesses and governments. Gallant was able to win both companies through investment bank-run auctions, sources said.
Osceola Capital seeded its own contribution to that “fertile” add-on environment this morning as it announced the completion of four acquisitions by its portfolio company Forward Solutions, a sales and marketing company based in Hershey, Pennsylvania.
The company bought ElectroRep, which services electrical supplies manufacturers on the West Coast and R/B Sales, which does the same job but in the Midwest and Great Plains. The pair will become a new division within Forward Solutions working with manufacturers, distributors, installers and maintenance providers within the electrical supplies sector.
The other acquisitions were a couple of service providers for utility, telecom and power manufacturers in the Southeast. Madigan McCune and Upper Midwest Utility Sales will merge into StruXur, Forward Solutions’ existing utility, telecom and power division.
Forward Solutions has now closed 22 acquisitions since its inception five years ago.
“Forward Solutions has shown a differentiated ability to expand each of its existing product categories to national footprints while simultaneously establishing new product categories through M&A,” said Patrick Watkins, partner at Osceola Capital, in a statement.
The focus on operations and add-ons is not something unique to the US. Over on PE Hub Europe we’ve also been writing up plenty of add-ons, while Nikos Stathopoulos, chairman of Europe at BC Partners, told me recently that value must also be created via operations – something particularly true today.
“In the current financing environment, we are very focused on managing short-term refinancing pressures given higher costs, and managers will need to be prepared to hold assets for longer,” he added.
Align Capital Partners has made an investment in McLean, Virginia-based Global Guardian, a security, medical and travel-related service provider.
“The team at Global Guardian is providing truly mission-critical services to its customers and is gaining share in the market based on the company’s relentless dedication to providing a highly reliable, full-service model,” said ACP managing partner Chris Jones in a statement.
That’s all from me today. Chris Witkowsky will be with you tomorrow for Wire Wednesday.