Q&A with David Friedland and Pete Lyon of Goldman Sachs on mid-market push

Buyouts recently sat down with Friedland, global head of M&A for the Cross Markets Group, and Pete Lyon, global head of the financial institutions group and the financial and strategic investors group, to talk about the new effort and the market overall.

Goldman Sachs launched a dedicated middle-market advisory and financing effort earlier this year, pushing into the market for companies—sponsor and non-sponsor backed—with enterprise values of $500 million to $2 billion. Goldman expects more than 100 bankers to work on the middle-market team, called Cross Markets Group. Three senior bankers, David Friedland, Will Bousquette and Rob Pulford, lead the group.

Buyouts recently sat down with Friedland, global head of M&A for the Cross Markets Group, and Pete Lyon, global head of the financial institutions group and the financial and strategic investors group, to talk about the new effort and the market overall.

Why are you making a dedicated push into middle-market M&A?

Friedland: We took a look at our business and our market share and recognized that on large transactions with large clients we have a really high market share. And we realized that places where we had more market share improvement opportunity was middle market companies, sponsors and sponsors’ portfolio companies. That focus resonated with clients. When you tell people that your mission is to go after a certain client base and that you are laser focused on that, it’s really effective and clients really appreciate that. So the view was to create a separate group for the middle-market and to make sure that while it’s separate, it’s also highly integrated with other industry groups.

Lyon: I think this is very important to emphasize… It is not an island—CMG is fully integrated with the industry groups and all our product groups. We have a nimble organization and ultimately, we want to deliver the best of Goldman Sachs to our clients. And guess what? A $500 million client CEO wants the same thing as the $30 billion company CEO. He wants senior people, he wants the best delivery of execution; and by putting a bright spotlight on the CMG business and highlighting it across industry verticals, we think it is the best way to go to market to deliver all the services of the firm.

What specific opportunities do you see in the middle market?

Lyon: Obviously, there is a fee opportunity for us, but the maturation of the alternative asset class at large, as it grows and becomes more important, is why we are doing this. As the industry matures, it consolidates. All of the funds that we’re going to be touching, or prospectively are going to be touching now—I don’t know if they are going to become the next KKRs, or Apollos, or Blackstones, but our bet is that many of them will. So, the more that we can touch now and help interact with them across all the different divisions of the firm—we think it’s a massive growth opportunity… Nearly 60 percent of our CMG business is driven by sponsors.

Friedland: The best deals aren’t always the biggest deals. The big ones are the ones that grab headlines—but to me, the best deals are the deals where you can have the greatest impact and add the most value… Especially to people who are personally and emotionally invested in something because they are the founder of the business, or a partner with the founder of the business. You add a lot of value in a deal like that—you make a client for life and make a friend for life.

What kind of reception did you get by middle-market sponsors?

Lyon: We started in April, so we are a handful of months into it, but it’s been incredibly strong. Once we started digging in with these clients, they fortunately for us were like “Jeez! Goldman Sachs has never knocked on my door before, but now when I’ve seen the love, boy, this is pretty interesting to us.” They were always attacked by a bunch of boutiques and smaller market firms, historically.

The receptivity has been really strong and we’re well ahead of plan in terms of where we thought we would be at this stage. It’s a hugely important growth initiative for the firm. David [Solomon] and John [Waldron] go and talk to our investment community about it.

Friedland: We’ve sold a lot of $200 million companies too, over the years. It’s all about where the opportunity is. You have to have the right probability of success, the right reason to conclude its franchise-enhancing, the right fee associated with whether the deal gets done or not. If I think of small food businesses, small apparel businesses, small beauty and personal care businesses—the ability to have these businesses for sale by Goldman Sachs to the large players in those sectors, was franchise enhancing. So we’ve always done it. Now we are going to do more of it in this separate group, to make sure we do more of it rather than just opportunistically and get a bigger share of it.

David Friedland (left) and Pete Lyon (right)

How have you been growing the new group over the past year?

Friedland: We focused most of our hiring this year on coverage people, to cover industry verticals and to cover middle-market sponsors. By the end of the year, we will have just over 100 bankers dedicated to Cross Markets Group. We will also have eight managing directors joining from the mix of boutiques as well as our direct competitors, including from Barclays, Piper Jaffray, BMO, Wells Fargo, Lincoln International, Rothschild. Out of that 100, some have been an internal realignment: the people who came out of the industry groups and some came out of the product expertise like M&A.

By the end of next month, we will have four senior bankers covering middle-market sponsors 100 percent of their time, at least four. The idea that we would have four sponsor coverage people fully dedicated to middle-market sponsors as their primary mission, I think that’s kind of a big deal. And that number could grow over time. These are people with existing relationships—not the great athletes that we thought we could train to do this; they are already great athletes who have relationships and been doing this for 20 years or so.

In EMEA, we’ve hired four managing directors since April, including Sergeii Hierner as an MD from Deutsche focusing on our Belgium market; Thomas Westin as a managing director from Barclays focusing on the Nordic region, Esma Yildiz as a VP from Arma focused on covering sponsor clients; and three M&A execution bankers, including Mahir Zaimoglu from J.P. Morgan as a managing director focusing on M&A.

Our focus next year is continuing that hiring on the coverage people, then adding hiring of M&A and execution people to work with and support that team. You should expect us to do significant hiring next year.

What are the sectors you expect to be most active for PE M&A in 2020?

Lyon: Fintech and tech are the sectors where we are seeing most of the activity. Sponsors are very focused on how technology is going to impact their portfolio. Pure play industrial companies want to know how technology is going to impact their business and how they go to market all the way from sourcing to distribution, and how they avoid becoming dinosaurs. [Their question is] what services and the amount of tech ecosystem are going to be applied to healthcare, to industrials, to financial institutions, that [they] can invest in now so there will be more demand for [those companies] later. So that’s a big theme we are seeing.

Friedland: The other area, which doesn’t neatly fit in an industry, is the business of services—so whether it’s healthcare services, consumer services or industrial services—or [other] service-oriented companies that are not competing with Amazon or Walmart for business. If they are need-based, people like that, because they believe it’s more recession-resistant. Those businesses are attracting a lot of sponsors.

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