The only area less active than lending and deal-doing these days is exits, so I’ve decided to liveblog the panel focused on that topic.
The Panel: Middle Market’s Momentum and the Future of Exit Alternatives
Panelists: Thomas R. Callahan, MD Lincolnshire Management, J. Hamilton Crawford of Houlihan Lokey, David Turner, Head of PE at Gaurdian, Jonathan Peskoff, MD at FBR, Jay Rothman, Partner, Foley & Lardner
10:55 Lincolnshire has sold 8 portfolio companies in the last 24 months. Callahan says seller pricing hasn’t come down. I’d say over the course of this conference, only one person for every ten I talk to says seller pricing actually has come down. (UPDATE: See below for that one person)
10:56 The moderator tells us this panel is supposed to be the positive one. Let’s see if that actually happens.
10:57 Foley and Lardner’s FIG group has been busier than they’ve ever been in the past. FIG companies with decent ROEs are trading at 4-5x earnings, lower than normal levels. Of course. So PE is making a big leap into the financial services world.
10:58 Turner says he’s been approached by a group that wants to create a fund focused solely on middle market banking consolidation. Tough time to raise a new fund, especially in that deep of a niche, I say. He didn’t say whether Gaurdian committed to it.
10:59 No revolutionary news on financial services here. “There will be increased consolidation in that industry.”
11:00 Let’s talk about exit opportunities. Good idea. Are people just holding on to portfolio companies for 3-4 years?
11:01 Someone says his firm is only picking companies that have a clear cut exit idea in the future. That’s almost always the case in the middle market, though.
11:02 Callahan says a lot of the companies that went to auction last spring are still available. Lincolnshire was able to pick the end buyer at the close of the original deal a few years ago, but that’s not the case today. AMPORTS was an example of that situation, he says, since he knew Goldman, etc were raising infrastructure funds and would want to buy it with multiples and a good staple in place. “Those were the good old days,” he says.
11:04 Peskoff says financing is still being arbitraged by people who can understand what assets are going to be worth in 2-3 years. These people believe that without leverage they can hold that asset in the next 12 or 24 months while the price of the assets returns to par. He says most people don’t have that kind of patience, especially since no one really knows when the book value on debt will come back.
11:07 Was the debt buying going on 6 or 7 months ago a big mistake?” It’s hard to tell. On Libor: “650 is the new 8.”
11:08 A lot of strategics panicked with the crash of the stock market and decided they can’t do their deals, so Rothman saw many lead strategics back out of deals, and financials were a long, long second.
11:09 Waiting is a realistic option for exits these days. There’s a lot more ops to do add-ons. However, a lot of family owned and entrepreneurial companies need the capital and the families want the liquidity. Pricing for the have-to-sellers have just begun to come down i the last 6-8 weeks, Rothman said.
11:11 There needs to be a sense of recovery from strategics, before its reflected in their numbers, before M&A across the board, and it could take two quarters, Crawford said.
11:12 Is it too optimistic to think things will start to improve (regarding M&A) in two quarters, by mid-09? Rothman says that regional banks are still providing money, but it won’t be until around late 09 until we see a recovery and see the government start talking positive.
11:13 Crawford says there’s been an increased sophistication in sellers, even family-owned companies. They’re not selling unless its a distressed situation. He adds that if he were an LP in Lincolnshire’s fund, he wouldn’t be worried if leverage came down even more, since he’d rather have the firm buy at even lower prices than they are now with a conservative capital structure. Callahan responds that Lincolnshire has sat on the sidelines for 18 months because it hasn’t seen the kinds of ops it likes.
11:16 He adds that the disparity on pricing between the buy and sell side have narrowed.
11:18 Turner says capital calls have decreased from 17-18 a week to 4-5 a week.
11:19 The moderator wants to talk about carry. We’ve already heard about carry from the last two panels. This is new though, Peskoff says a lot of companies will want to go to Cayman Islands or Ireland to avoid it. Really? It’s that easy?
11:20 He also says people are taking lower exit multiples to sell now instead of waiting, to avoid a potentially higher tax on carry, or they’re even doing hold-backs, or “little nuances on the side” in order to make up for it. LPs can NOT be happy hearing that!
11:21 Are people worried that regulatory changes will hurt performance, the moderator asks. Crickets. I’ll take that as a “no.”
11:23 Peskoff goes to bat. He says the only answer you can say, “We don’t know what the changes are yet, so we can’t really answer that.”
11:24 The SBIC program has been all but suspended, Turner says. He says Obama’s interest in investing in green and new technology is a strong opportunity to revive “pro-business, proactive” measures, be they involved in universities or the Fortune 2000.
11:25 The moderator is told “We are very, very behind on time.” The moderator says, “Oh dear.” Polite laughter. Time for one question.
11:26 No one heard the question. No time!
11:27 The question is about roll-ups. Peskoff says this is an excellent time for roll-up. He mentions GTCR, who has been very active apparently. This is their time, given the low valuations. The upside for sellers is great, being part of a larger company, especially for small public companies.
11:30 Rothman add’s were going back to the credit structures of the late 80s with 4-5x all-in. He said first and second time funds will have to be careful and learn to do roll-up type deals to get their returns more creatively since there’s no more financial engineering magic.
11:31 Most. awkward. ending ever. The moderator’s mike got turned off while he was announcing the next panel. Which I will liveblog in the new thread. Stay tuned!
11:33 Wait, nevermind, Clifford Brokaw IV of Corsair Capital has declared the next panel is “off the record,” so to respect the privacy of his public statements, I’ll let you wait for the video of the panel to be posted on The Deal’s web site!