Good morning, Hubsters. MK Flynn here with today’s Wire.
Optimism is the name of the game. Despite bad economic news, a tighter loan environment and heightened scrutiny on the private equity industry from the federal government, PE pros continue to express faith in the model.
For a close look at how one firm in the lower-middle market is managing to close deals this year at a healthy clip, I reached out to Jon Pressnell, a partner at Blue Point Capital Partners.
The PE firm, which has offices in Cleveland, Charlotte, Seattle and Shanghai, backs companies that generate between $30 million and $300 million in revenue in the industrial, business services, consumer and value-added distribution industries. The firm is often the first outside provider of equity capital in a growing business.
Blue Point has closed several deals this year. In August, the firm made a platform investment in Water Lilies Food, a Bayshore, New York, maker of frozen egg rolls, dumplings and other Asian-inspired cuisine. The firm invested alongside Peter Lee, second-generation family member and CEO, who retained a significant ownership position in the company. Lee’s family founded the business in 1995.
This Spring, portfolio company Brimar made an add-on deal for Crowd Control Warehouse, a designer and distributor of barricades, belt barriers and traffic control devices; and another portfolio company, National OnDemand, acquired Unified Utility Alliance, a cable and fiber construction company.
Here are some excerpts from my interview with Pressnell:
How is Blue Point managing the gap in expectations between buyers and sellers
We have seen sellers who have value expectations that were likely set pre-covid, pre-Ukraine, pre-inflation. A few things we have done to bridge these potential gaps:
Continued to invest in our value-add resources, including our integrated team across global supply chain, data and digital and human capital, as well as leverage our operating executive network, among others.
We look for meaningful rollover equity from sellers and management with the goal being that they see the value we bring with our experience and capabilities and are encouraged by the value creation plan which helps bridge those gaps.
What’s the impact of rising interest rates on deal valuations?
Rising interest rates have a dampening effect on valuations, and the combination of rising rates, inflation and recessionary concerns seems to have made buyers more cautious around certain end-markets and business models, but for the size of companies where we typically play, we haven’t seen significant valuation reductions, especially for quality assets.
The transactions you’ve closed in 2022 span several industries. What do they all have in common that allowed the deals to be completed in this environment?
With add-ons, we have really focused on highly strategic additions that expand customer base, geographic presence, service offering, etc. For platforms, we have focused on finding opportunities where we can bring transformative and unique capabilities to the table. For example, our recent Water Lilies investment is one where we have over a 10-year history of investing in food and beverage businesses, operating partners with direct frozen Asian cuisine market experience and a track record of helping founder-led businesses. Local deals also continue to be a key player, as five of our last eight platforms have been a regional relationship.
Are loans harder to get and more expensive? Has the ratio of equity to debt changed in your deals? Have covenant terms changed?
Our portion of the debt financing market is generally less volatile than the larger funds, and we typically are not looking for the highest leverage multiple possible, so we haven’t seen a significant shift. It’s tough to say, but the market has probably pulled back 0.25x to 0.5x on total available leverage alongside the rise in underlying interest rates, but I don’t think we have seen any other significant shifts in other terms or covenants.
For more, read my full interview here.
Value creation. Rising interest rates may not mean lower returns on new deals. That’s what private equity investors said last week at the annual IPEM conference in Cannes, reported Private Equity International’s Adam Le.
“Nothing tells me that in a rising interest rate environment, you should necessarily [worry],” the co-head of private equity at a Franco-German investment fund told Adam. New deals will reflect the interest rate environment you’re in and assets will be repriced. Sure, on existing portfolios, returns will come down and exits will not be as rosy as they were a year ago, he added. “For new stuff, I don’t see any need to think about lower returns.”
The industry appears to believe that muted returns will be temporary and that its ability to generate alpha in the long run is rooted in its ability to act as canny operators. Claire Chabrier, president of French private equity association France Invest and associate director at Amundi Private Equity Funds, told PEI that around two-thirds of returns in the French PE market are driven by value creation coming from sales and profitability growth in portfolio companies.
“It’s not leverage, it’s not multiple increase, it’s really that companies are growing when they are backed by private equity investors,” Chabrier said. “Two-thirds of the value creation comes from all the day-to-day jobs we make in a company, helping them to transform, to grow, to build up.”
For more, read Adam’s story here.
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