Morrison Foerster’s Omar Pringle: Opportunistic M&A ‘not that simple’

    There is 'a reluctance of buyers to devote a lot of resources towards looking at companies or participating in auctions that they ultimately don't think that they may win or be competitive in.'

    Omar Pringle, Morrison Foerster

    PE Hub caught up with Omar Pringle, a partner at law firm Morrison Foerster, to get his thoughts on the dealmaking environment. Pringle works on buyouts, private equity investments and M&A, both domestic and cross-border. His clients include sponsors, corporates and family-owned businesses.

    Although Pringle has spotted a slowdown in dealmaking this year, as companies adapt to a new environment of more expensive debt and slower growth, he still sees opportunities for PE firms.

    Has dealmaking momentum held up so far this year?

    Private equity buyers continue to be well funded; there is a lot of dry powder to spend. That being said, we have seen a slowdown in deals this year as compared to last. Factors contributing to that include the current [macroeconomic] environment, fewer targets coming to market due to certain businesses in certain sectors not necessarily able to meet their budget, or the tightening of the debt markets outside of the direct lending space. We have also seen private equity firms doing a couple of things such as focusing more on their portfolio, and they have been more selective in the deals they do go after.

    Are outside pressures such as inflation, rising interest rates and potential recession pushing down valuations? How are PE firms reacting to this?

    Well, I think you start with what has been a very competitive environment for assets for private equity in the past few years, and last year in particular. That competitive environment led private equity to start considering the public markets much more seriously and we saw a trend towards take-privates last year. The factors you mention ought to continue that trend, with private equity firms seeking to be opportunistic in the sense that a good business may be trading at a lower price than a private equity firm might perceive to be its inherent value.

    Certainly, we have seen private equity firms seeking to be opportunistic in this climate in that manner. But it’s not that simple. Public companies and their boards are also quite aware of the fact that this is an opportunistic market. They may also view that their current trading price may not reflect their inherent value or even if it does, their value in this current environment may not reflect the long-term value of the company.

    Is there a gap between buyers and sellers in deal valuations? What kind of returns are private equity investors expecting?

    We have definitely been seeing a gap in valuation expectations between buyers and sellers. This has caused some sellers to pause their processes or some buyers to back out for fear that they may not be able to meet the sellers’ expectations.

    What about the due diligence process? Is it becoming more conservative?

    The due diligence processes, as far as I’m aware, hasn’t changed materially. That said, one trend we have seen is a reluctance of buyers to devote a lot of resources towards looking at companies or participating in auctions that they ultimately don’t think that they may win or be competitive in. That may not have been the case a year ago. But nowadays, more buyers seem reluctant to expend as many resources until they have a sense that they are likely going to be among the competitive buyers for that business.