Service Providers Serve Up White Papers

Today I’m looking at two white papers, one from Pepper Hamilton on distressed debt investing and one from Pricewaterhouse Coopers on growth through M&A.

Both papers open with some (seemingly) obvious statements: For growing businesses, PwC argues, the middle market is still in an OK, or even strong, position. Yep, we know. Likewise, Pepper Hamilton offers the no-brainer advice to distressed debt investors: Conduct due diligence.

All that seems pretty obvious, but upon reading I discovered some very relevant, worthwhile points, which I’ve nicely summarized below.

PwC On Growing Via M&A

The firm points out even though mid-market deals are still happening, there subtle changes to the deal-making process have developed, and buyers and sellers should be prepared for them. A few examples below.

-Banks are cautious because of the spiking default rate, not because of subprime write-offs, which they’ve already taken the hit on and moved past.
-To help cautious lenders decide whether or not to lend, they’re aggressively “stress testing” whether earnings will hold up in a downturn.
-A stress test, aka “kicking the tires,” takes more time, which means it could take months to find a lender.
-Meanwhile, buyers themselves are doing phased diligence lasting a month or more.
-Adding to the slower pace, PE is taking a more active role in syndication, as opposed to the self-syndication of the last cycle.
-And since those deals are taking longer and the market is so volatile, buyers are demanding “real time” numbers from targets up until the deal’s closing.

Pepper Hamilton On Distressed Debt Investing

With handfuls of private equity firms deciding to throw on a “distressed debt buyer” hat, it Pepper Hamilton’s advice is on the money. I’m not criticizing anyone of style drift—take opportunities when they’re available, I say—but on the flip side, when wading into unfamiliar territory, I also say take advice when it’s offered. See below for two choice highlights and a link to the full text.

-Tax treatment on returns that are subject to US tax law is mostly unattractive to foreign investors.
-Changes to Regulation M, which propose to delete all reliance on ratings organizations, could benefit investors “with resale strategies that liberalize restructions on their ability to trade on-investment grade securities.”
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