Happy Fri-yay, Hubsters! This is the last edition of the Wire for this year and we will be back on January 3.
Today to start with another batch of Q&A’s. We have some thoughts from a managing partner at Thoma Bravo, as well as how Riverside co-CEO’s see 2023 playing out.
Continuing with the series, we have some predictions from a founder of a mid-market PE firm.
We also have some recommended podcast listening for the holidays and last and certainly not least, we have healthcare heartbeat.
Talking Thoma. Tech-focused private equity firm Thoma Bravo had an extraordinarily active year, taking advantage of the declining valuations of public technology firms to close some really big take-private deals in 2022. Holden Spaht, managing partner at Thoma Bravo discussed the year that was and also shared his thoughts about what is in store for 2023.
What should PE folks be most excited about for 2023?
2023 will be, at times, uncertain and turbulent for investors and companies alike, however, private equity’s governance structure – clear direction from a control owner – is a competitive advantage in these conditions and highly sought after by existing owners and operators. During these times, we will also see true leadership emerge among our portfolios. Leaders who have built great teams, are nimble operators and collaborative decision-makers will see their businesses emerge stronger through this cycle. As always, the software and technology space remains an exciting place to be, and we are optimistic about the continued opportunities ahead for partnership with great companies.
Riverside reflection. In another installment of PE Hub’s new Q&A series with private equity leaders reflecting on highlights from 2022 and sharing their outlooks for 2023, we turn to Béla Szigethy and Stewart Kohl, the co-CEOs of The Riverside Company.
What was the biggest challenge to completing deals in 2022?
BS: We saw the bid-ask spread widen in the spring, and it remains that way even through the end of the year.
We also experienced that, when we exit our larger platforms, the buyers have trouble getting financing. The squeeze in financing especially occurred during the last four months of the year.
How do you expect the first six months of PE dealmaking in 2023 to compare with the last six months in 2022?
BS: Definitely anticipate an improvement as buyers and sellers adjust, and the bid-ask spreads narrow. I also imagine we’ll see some improvements in the credit markets.
Back to ‘normal’. Obey Martin Manayiti spoke with Richard De Silva, founder and managing partner of Lateral Investment Management for the Q&A series.
What will be the most important trends affecting your dealmaking in 2023?
Here are four trends that may impact our dealmaking and our portfolio companies over the next 12 months.
• Serving cost-reduction mandates: As corporate America switches from growth at any cost to an increased focus on profitability, the mandate is to reduce internal cost centers.
• Positive labor trends: Hiring and retention are becoming easier and skilled workers are more concerned about job security.
• Accretive strategic acquisitions to build scale and geographic reach: Conditions are improved to roll up sub-scale competitors at attractive valuations. With a strong dollar, US companies have the opportunity to acquire high-quality international targets at discounted values.
• Improved competitive dynamics: The economic weakness and the pull-back in exuberant capital markets will no longer prop up weak value-destructive competitors and put an end to the short-term irrational business practices that have hampered healthy markets and eroded margins without creating sustainable value.
Podcast party. PEI Group has a new series of podcast, and we have two episodes that will be great to listen to over the holiday break.
MK Flynn hosts the first one, as she spoke with a wide range of dealmakers, including PE firm leaders, lenders and investment bankers, about the impact of high interest rates and other factors, such as high inflation, on PE-backed transactions.
Featured in this episode: Norm Alpert, founding partner, Vestar Capital Partners; Greg Belinfanti, senior managing director, One Equity Partners; Marc Leder, co-founder and co-CEO, Sun Capital Partners; Ignacio Jayanti, CEO, Corsair Capital; Milwood Hobbs Jr., managing director and head of North American sourcing and origination, Oaktree; Michelle Handy, managing director and head of portfolio and underwriting, First Eagle Alternative Credit’s Direct Lending platform; and Peg Jackson, managing director, software, Internet and digital media, Stifel.
In the second episode, Chris Witkowsky, editor of Buyouts, spoke with LPs and consultants about how institutional investors are approaching the higher-rate environment, including by potentially shifting asset allocations. Significantly, LPs discuss what they are looking for in GPs amid the new environment.
Featured in this episode: Andrea Auerbach, global head of private equity at Cambridge Associates; Jim Pittman, executive vice-president and global head, private equity, at British Columbia Investment Management Corporation; Craig Ferguson, managing director, private equity, with Investment Management Corporation of Ontario; and Drew Schardt, head of global investment strategy, co-head of investments and co-head of direct credit at Hamilton Lane.
Healthcare heartbeat. I recently had the chance to catch up over Zoom with Andrew Adams, co-founder and managing partner, Oak HC/FT for some thoughts on what healthcare deal activity might look like to start 2023.
“There’s still always going to be this pocket of normal activity,” he said. “There’s a real divide between the have and the have nots out there. The companies that are high performing with great teams and great growth plans – those are always going to get funded at an attractive price in the private markets. Whether that’s an M&A transaction, buyout firm or strategic acquisition, that’s just always going to happen at a premium. So, if you want to say that’s normal, then that’s not going to stop.”
He also predicts there is going to even more of a divide.
“There’s going to be a top decile or quartile of companies that are going to continue to get funded and acquired at premium prices, then there’s the rest of the market,” explained Adams. “And I think there’s different categories. Then you have the next level that’s going to be able to get financing, be able to fund their growth plans, or they’re still going to get acquired, maybe it’s a turn or two less than the height in 2021, but it’s still an attractive price given an investors basis, and there’s going to be a seller at that price. Then there’s the bottom half of the market where the math is not adding up – that segment will incur the harsher realities of this market.”
That is going to put a bow on this week and the year, as our parent company PEI Group is closed all of next week. It was a pleasure writing to you all this year and thank you for reading our content every day. Wishing everyone the happiest of holidays and happy new year!!