RF sees modernization of legal industry with Nextpoint investment

Salutations, dealmakers!

It’s Rafael Canton here filling in for MK Flynn for this Thursday edition of the Wire.

This morning, we have a look at PE firm RF Investment Partners making an investment in Chicago-based legal software developer Nextpoint.

PE Hub and PE Hub Europe have been asking private equity thought leaders for their perspectives on dealflow in the second half of 2023 for our ongoing series of Q&As. Our own MK Flynn spoke with Churchill Asset Management’s Anne Philpott as part of the series.

Also, we have a look at some deals including an acquisition by Kian Capital this morning and a merger involving one company backed by PE firm Recognize.

How to make it in this economy
Let’s first look at Churchill’s H2 outlook on dealmaking.

Churchill Asset Management’s director Anne Philpott spoke to MK Flynn about the uptick in add-on deals as well as what’s driving demand for equity co-investments. Here’s an excerpt from the conversation.

Where are you seeing opportunity for the remainder of the year?
Despite macroeconomic uncertainty, we are seeing LBO transactions continue to be completed for the best, most highly coveted assets. There has been a meaningful uptick in add-on activity, as the best and healthiest companies often play offense and seek to grow through M&A. Private capital managers with large existing portfolios and flexible mandates are well positioned to benefit from this trend.

Private equity firms are reevaluating how they structure transactions to ensure optimal capital structures in today’s higher rate environment, and so we have actually seen dealflow increase 20 percent across our junior capital and private equity solutions business this year. In many instances, sponsors are looking for fixed cash and payment-in-kind (PIK) coupons, or to increase equity through equity co-investment partners.

It is also difficult to ignore what many are calling the “Golden Age of Private Credit,” thanks to higher interest rates, more conservative capital structures, and the market share gained from the broadly syndicated market. All-in-all, for those with dry powder, we believe it is an excellent time to be deploying middle market private capital.

Ultimately, we do believe the M&A market will normalize, and so do our sponsors. According to a recent proprietary survey we conducted, which garnered responses from 95 of our core private equity relationships, 54 percent said they believe M&A activity will return to normalized levels in the first half of 2024.

What’s driving demand for equity co-investments today?
According to Churchill’s recent private equity survey, about 95 percent of respondents said their usage of equity co-investments has stayed the same or increased in today’s environment.

Market complexity can lead to very attractive opportunities for institutions that have co-investment capabilities. As distributions from primary programs have decreased, we’re beginning to see a lot of co-investment capital sitting on the sidelines. Many institutions are ill-equipped to transact or have not built the required scale. At the same time, you have a constrained lending market, and valuations for best-in-class companies are not necessarily correlating to what is available in the debt market. Coupled with a difficult fundraising environment, sponsors have been looking to equity co-investment from trusted LPs to continue doing deals.

RF Investment Partners rests its case
Yesterday, I wrote about how RF Investment Partners, a New York City-based PE firm made a minority investment in Chicago-based legal software developer Nextpoint.

The legal industry needs modernization. That’s where companies like Nextpoint come in to the picture. Nextpoint creates eDiscovery software which helps law firms keep track of evidence and legal materials digitally. The software is an opportunity to take a manual task and make it automated, leading to potential sales in the market.

“One of the things that stood out to us about the market is, you have an industry that’s really behind on technology and historically been a slow technology adopter,” Jacob Gordon, a director at RF, told me.

Auto repair
Now for some recent deals.

Private equity firm Kian Capital has launched an automotive repair platform with its acquisition of a Meineke Car Care franchisee. The platform will go by PARC Auto.

“We look forward to expanding that leadership into new markets through new store openings and acquisitions,” said Kian principal Caldwell Zimmerman in a statement. “Meineke is well-positioned to be an industry consolidator with its highly recognizable and trusted brand supported by best-in-class franchisee resources provided by Driven Brands.”

A tech merger
SpringML, a California-based tech services company that’s backed by Recognize, is merging with Egen, a Naperville, Illinois-based cloud migration, application modernization and platform engineering provider.

The merged company will operate under the Egen brand. Operating partner Saleem Janmohamed will take on the role of chairman and CEO.

“The SpringML merger with Egen reflects Recognize’s mission to create the next generation of great technology services companies,” said Frank D’Souza, co-founder and managing partner of Recognize, in a statement. “The combination of the companies enhances their competitiveness in helping organizations unleash the power of data and insights to create action and drive performance.”

Well, that’s it from me today. My colleague Obey Martin Manayiti will be taking care of the Wire tomorrow.

If you have any thoughts or questions, please email me at rafael.c@pei.group.

Thanks,

Rafael