Good morning dealmakers, thank goodness it’s Friday!
It’s Obey Martin Manayiti here with the newsletter.
To cap off the week, I’m covering, below, several themes I heard folks talking about at the DealMAX conference, including strategies dealmakers are deploying in this tight macroeconomic environment.
But first, let’s take a look at a recent enterprise software deal that caught my eye.
Yesterday, Austin- based Serent Capital said it is investing in Bath, Michigan-based BS&A, an ERP software provider to municipalities.
The deal marks Serent’s sixth investment in the govtech market.
The investment will enable the company to accelerate its geographic expansion and drive further adoption of its market-leading cloud product.
“Through our work in the govtech ERP ecosystem over the past decade, we have developed a great appreciation for the quality of BS&A’s software and the special relationship the company has built with its customers,” said Stewart Lynn, a partner at Serent, in a statement.
BS&A has over 2,000 customers across financial management, assessing and tax, payroll, utility billing, and community development software. These customers range from small municipalities to large cities and the platform allows city managers and their staff to perform their day-to-day tasks with streamlined functionality, drive substantial productivity gains in their operations, and deliver a better citizen experience, said the company.
Recurring and predictable
The BS&A deal is part of a wider trend.
Enterprise software is teeming with deals this year. Last month, I did a deep dive into the category, including interviews with partners at PE firms Vista Equity Partners, Thoma Bravo and investment bank William Blair.
“Private equity will always love software,” Pete Dalrymple, managing director and co-head of technology investment banking at William Blair, told me.
“Maybe the valuations are different, but the fundamentals are not. Software is embedded in our daily lives and is ubiquitous across numerous industries and use cases. In good markets and bad, investors appreciate the recurring and predictable nature of these businesses, their capital efficiency, and the additional M&A opportunities that oftentimes come along with owning a platform of scale.”
I spent much of this week in Las Vegas at DealMAX, a mid-market focused conference that brought together thousands of participants.
A lot of topical themes arose during the panel discussions, small talk over snacks, in the gym or in the hallways, 1:1 meetings, during the reception and other places. Topics ranged from the current dealflow, investing trends, the cost of debt and the overall state of the economy, concerns with the banking industry, especially how that is affecting regional banks and their lending capacity, operational efficiency from the PE firm’s perspective and portfolio company management, the labor market, and more.
One advisor that I spoke to remarked that despite all the challenges, good deals will always sail through as we have seen with a few deals that are defying the current market. There was a lot of talk too on how so many deals are also failing to cross the line based on the current market.
So my focus was to talk with PE investors, lenders, advisors and investment bankers about what is changing in deal approach, negotiations, due diligence, operations as well as to gain some insights into the conditions that are driving both successful and unsuccessful deals.
Some buyers are picking up opportunities, as fatigued founder-led and family owned businesses are looking forward to beating the stressed economy.
My conversation with Francis Carr, managing partner at Milton Street Capital, illustrates the point.
“We have a lot of dealflow right now,” he said. A lot of sellers are trying hard to de-risk their businesses after having lived through the pandemic and navigating the current tight macroeconomic environment.
“We are doing price discovery as soon as we can,” he said. Additionally: “We have looked at structural solutions where we may make a control investment, but our capital will sit in front of the seller’s rollover. In this case, they are still achieving their goal, and we are having our downside protected.”
Other PE firms said their focus is now rooted in sourcing more than ever, focusing on frontloading the commercial diligence and refining their investment thesis. This all provides a semblance of more certainty to the negotiations to carry the deals to the finishing line.
This current economic environment is pushing some to spend a lot of time with their portfolio companies than before, specifically on hedging the business, managing working capital, cashflow management, increasing operational efficiency, and more.
Instead of establishing platform investments, other PE players said they are rather focusing on add-ons as a way of putting capital to work, avoiding the economic exposure that comes with new businesses in the form of platform investments. This way, they will strengthen the current portfolio as they wait for an opportune time to exit.
Others noted a co-investment trend amongst PE firms. Because of the high cost of debt, many PE firms are not able to write big checks and they are preferring joint investments that can allow them to spread out the burden associated with rising interest rates.
Advisors who sit on both sides of dealmaking said buyers are putting more scrutiny on financial performance of their targets, and they are also getting sensitive to more minor deal points than in the past.
Buyers are digging harder on due diligence than in 2021 and 2022.
“More deals are also falling apart or going on hold as buyers are scrutinizing issues harder, they are identifying that sometimes earnings may not be exceeding projections in the same magnitude they were over the last few years, and they are also closely watching inflation pressures and financing trends,” said Brian Myeroff, partner at Forvis.
Many dealmakers predicted the situation will improve in the second half of the year and into early 2024, but it’s tough to tell.
“I have been doing this for almost 20 years, and this is one of the most uncertain periods that I have seen,” said Mike Murray, Peleton Capital Management managing partner.
That’s it for me today. PE Hub Europe editor Craig McGlashan will fill in for MK Flynn on Monday’s newsletter.
Have a great weekend and Happy Mother’s Day!