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Data provided by 2017 PE in Review
Data provided by
2017 PE in Review
Credits & ContactPitchBook Data, Inc.
JOHN GABBERT Founder, CEO
ADLEY BOWDEN Vice President,
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Content
GARRETT JAMES BLACK Senior Analyst
HENRY APFEL Data Analyst
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Contact PitchBook pitchbook.com
RESEARCH
EDITORIAL
SALES
ACG New York
Bobby Blumenfeld, Executive Director
www.acgnyc.org
COPYRIGHT © 2018 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems—without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment.
Welcome Letter 3
Middle-Market Deal Flow 4
Middle-Market Exits 5
Middle-Market Fundraising 6
Five Things You Missed: 2018 Healthcare
Event7
Five Things You Missed: Monthly Event 8
Five Things You Missed: State of Union
Luncheon Event9
ACG NY Member Highlight: Anthony L.
Caudle10
ACG NY Member Highlight: Don Ritucci 11
ACG NY Member Highlight: Bobby
Blumenfeld12
Take Note: Independent Sponsors 14
Supply Chain: EBITDA Accelator or
Inhibitor?15
What to Consider When Buying a
Blockchain Company16
2018 Outlook: Middle-Market M&A
Commentary17
2018 M&A predictions 18
Event Calendar 2018 19
Contents
@ACGNYC
2 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
Surviving in a High-Multiple Environment“David, it’s called LBO for a reason!” my unnamed private equity friend yelled, with particular stress on the “L” for “leveraged.” He went on to say what many of you have said yourself or heard your own friends say: “We can’t pay 10x for a business. These multiples are crazy!”
So in this environment, what is a PE firm (or family office or a strategic) to do? As the lower to middle M&A market has become more efficient, the flow of capital to PE firms from limited partners has increased dramatically, leverage remains relatively cheap and easy to access, and valuations have, not surprisingly, increased. PitchBook and other services regularly address this trend in their reports—the consensus seems to be that multiples have increased roughly 2x in the past five years.
The “good old days” of finding undervalued, proprietary deals are gone, at least for the foreseeable future. And upward pricing pressure on hairier or more complex deals has increased. Another PE friend who targets complex-situation investments noted that deals trading at 5x-6x roughly five years ago are now routinely 8x deals. Same characteristics, higher price. Even larger PE funds who developed sophisticated direct calling efforts have changed their focus. They have moved from trying to find proprietary, founder-owned deals to direct outreach to their smaller PE brethren in order to understand their portfolio and develop strategies to get ahead of the inevitable auction processes. LBOs & Financial Engineering Are Dead…for the Lower to Middle Market
In the lower and middle market, “buy and hope” no longer works. Leveraging up, paying down debt, and cutting costs alone will not cover the ground to deliver the returns that LPs expect, especially when considering an 8x deal is now a 10x deal in today’s market. A true buy-and-build approach, in which there is meaningful industry consolidation and the ability to leverage synergies, remains an effective strategy. Vertical Specialization Expands Rapidly
Many formerly generalist firms in the lower to middle market have recognized the need to focus on one or more verticals. By honing their industry knowledge and competency, they can source better deals, be more attractive buyers, and build stronger, more relevant businesses. Value Creation Is the New Buy-and-Build
There is a movement among PE firms to focus not on cost cutting, but instead on tangible value creation activities, particularly those that are growth-oriented. Operating partners, supply chain and IT consultants, and talent management strategists are all examples of value creation providers who are seeing significant growth in their work with PE portfolio companies. Growing the top line, combined with prudent selling, general & administrative management and an effective add-on acquisition program, can be a wonderful cure for higher entry multiples.
At ACG New York, we are committed to helping our members grow their businesses and remain relevant in a fast-changing M&A world. Our network of dealmakers, transaction advisory firms and value creation consultants is an ecosystem that builds off of one another. While it is true that our ecosystem starts and ends with dealmaking, the other components of the ecosystem are critical contributors to the success of a deal. And the ACG NY network is an efficient, productive and fun way to build and grow relationships that are vital to your business or firm’s success.
David Hellier is President of ACG New York and a Partner at Bertram Capital.
3 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
New highs marked in 2017New York middle-market PE activity
In a contrast to overall US private
equity deal flow, which has declined
mildly over the past few years, the
New York middle market saw a
surge in dealmaking by both value
and volume in 2017. In fact, the 178
transactions completed last year
signifies a new high for dealmaking
within the state. After a significant dip
in 2016, this resurgence can be mostly
explained by an increased focus on
the core and lower middle markets as
investors look to avoid overpaying in
an expensive climate. Moreover, there
has been increased usage of add-
ons—in fact, there was a record tally
of add-ons in New York last year. Via
such methods, PE firms have been able
to stay quite active, yet it is likely that
after such heights, if the high-priced
climate persists, there will be a decline
in volume in 2018.
New York middle-market PE deal flow
A new high for both total deal value and volume
New York middle-market PE deal flow
Source: PitchBook. Note: As the PitchBook database is updated continuously, there can be minute
shifts in data totals in between time periods, hence estimated figures take such a historical change into
account.
Source: PitchBook
0
20
40
60
80
100
120
140
160
180
200
$0
$5
$10
$15
$20
$25
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Deal Value ($B) # of Deals Closed
0
10
20
30
40
50
60
$0
$1
$2
$3
$4
$5
$6
$7
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2010 2011 2012 2013 2014 2015 2016 2017
Deal Value ($B) # of Deals Closed
4 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
Elevated exits resumeNew York middle-market PE-backed exit activity
New York middle-market PE exit flow
Sellers resume activity, capitalizing on a welcoming environment
New York middle-market PE exit flow
On a quarterly basis, it’s clear exit
momentum slackened in the back half
of 2017 for PE sellers in New York.
However, by and large, exit volume
has remained more than robust for
the year as a whole, testifying to
PE firms’ desire to capitalize on the
current market environment. Asset
prices tend to be high, there’s plenty
of acquisitive appetite (especially on
the part of fellow PE fund managers)
and although economic figures are
somewhat mixed, by and large there
is optimism for 2018 growth rates in
the US. Accordingly, those holding
portfolio companies that are close
to or primed already for an exit are
looking for liquidity now, which should
prop up exits for the foreseeable
future, at least on a historical basis.
Source: PitchBook
Source: PitchBook
0
10
20
30
40
50
60
70
80
$0
$2
$4
$6
$8
$10
$12
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Exit Value ($B) # of Exits
0
5
10
15
20
25
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2010 2011 2012 2013 2014 2015 2016 2017
Exit Value ($B) # of Exits
Source: PitchBook
5 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
Is fundraising set to slide?New York middle-market PE fundraising
As it is always worth noting, PE
fundraising tallies in the state of New
York will be skewed significantly by
the fact flagship buyout firms are
headquartered in New York City.
Consequently, it’s intriguing to utilize
the state’s fundraising figures as a
rough gauge of industry sentiment
and purely buyout fundraising. Given
the strength of fundraising in recent
years, it’s likeliest that the decline
in 2018 is primarily cyclical. That
said, it remains to be seen if it is the
beginning of a typical downturn in
fundraising activity, as well as the full
extent to which fundraising figures
may diminish. As limited partners’
appetite for exposure to PE remains by
and large robust, the cycle is unlikely
to dip very low, barring a significant
macroeconomic shock.
New York middle-market PE fundraising
2017 experiences a cyclical downturn
New York middle-market PE fundraising
Source: PitchBook
Source: PitchBook
0
10
20
30
40
50
60
70
80
$0
$10
$20
$30
$40
$50
$60
$70
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Capital Raised ($B) # of Funds Closed
0
2
4
6
8
10
12
14
16
18
20
$0
$5
$10
$15
$20
$25
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2010 2011 2012 2013 2014 2015 2016 2017
Capital Raised ($B) # of Funds Closed
6 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
1
On February 22, we attended ACG New York’s 2018 Healthcare event. Here are five of our top takeaways from the panel, whichfocused on the Healthcare Industry in the US.Prepared by TresVista Financial Services
5 THINGS YOU MISSED LAST WEEK –
1Latest Trends: The Healthcare Industry is rapidly changing and becoming more dynamic. One of the new trendsinvolves hospitalists, physicians whose primary focus is the general medical care of the hospitalized patients. Theyinclude mainly internal doctors who look after the well-being of the patients.The main winning points lately have been Technology and Data, which seem to provide more consumer satisfaction.The latest in Healthcare Technology, i.e. Tele-Health or Tele-Medicine, involves the use of digital tools for medicaltreatment. All said, the competitive advantage rests on patients’ preference.
2Acquisitions and Partnerships: There has been a rapid consolidation in the Healthcare Industry. Main points toconsider in an acquisition are the scale of operations and market share. A similar scale of operations gives the acquirersynergies and market share is important for the acquirer to make sense of the acquisition. The latest and biggestcoalition between Amazon, Berkshire Hathaway, and J.P. Morgan is focused on lowering healthcare costs for thecompanies’ employees and delivering significant advancements for all patients. Tremendous synergies are expectedto arise from the coalition.
3Physicians and Patients: Physicians are different to handle, if not difficult. They have an intellectual and an emotionalinvolvement, as they must connect with the patients, therefore it’s very important to provide physicians with properincentives. On the other hand, patients are the primary focus. It is important to provide new and better services in terms of proper transportation, technology, medical services, etc., while employees should be emphatic and shouldmaintain proper standards for the patients.
4Competitiveness: Healthcare is expensive. Hence, it is important to partner up with patients and insurance companiesin order to be competitive and efficient. Insurance approvals are very important, as this is the first step to gain theconfidence of the patients. There will always be a tradeoff between cost effectiveness and efficient physicians,therefore it is important to find the right mix. The culture in the organization also affects the competitive strategy, asit affects the consumer satisfaction.
5Due Diligence: The main challenges faced in doing due diligence in acquisitions are aggressiveness and the need forquick results. Due diligence should involve integrating the infrastructure of the two companies. It is important toengage with the staff and make them feel at home. See what the company does better and try to adapt to that to makean overall better company. Companies should be able to get the best of the employees from the company beingacquired and that is possible only with proper due diligence.
Sponsored By
5 Things You Missed
1. Latest Trends:The healthcare industry is rapidly changing and becoming more dynamic. One of the new trends involves hospitalists, physicians whose primary focus is the general medical care of the hospitalized patients. They include mainly internal doctors who look after the wellbeing of the patients. The main winning points lately have been technology and data, which seem to provide more consumer satisfaction. The latest in healthcare technology, i.e. tele-health, tele-medicine, involves the use of digital tools for medical treatment. All said, the competitive advantage rests on patients’ preferences.
2. Acquisitions & Partnerships: There has been a rapid consolidation in the healthcare industry. The main points to consider in an acquisition are the scale of operations and market share; a similar scale of operations gives the acquirer synergies, and market share is important for the acquirer to make sense of the acquisition. The latest and biggest example coalition between Amazon, Berkshire Hathaway and J.P. Morgan is focused on lowering healthcare costs for the companies’ employees and delivering significant advancements for all patients. Tremendous synergies are expected to arise from the coalition.
3. Physicians & Patients: Physicians are different to handle, if not difficult. They have an intellectual and an emotional involvement, as they must connect with the patients, therefore it’s very important to provide physicians with proper incentives. On the other hand, patients are the primary focus. It is important to provide new and better services in terms of proper transportation, technology, medical services, etc., while employees should be emphatic and should maintain proper standards for the patients.
4. Competitiveness: Healthcare is expensive. Hence, it is important to partner up with patients and insurance companies in order to be competitive and efficient. Insurance approvals are very important, as this is the first step to gain the confidence of the patients. There will always be a tradeoff between cost effectiveness and efficient physicians, therefore it is important to find the right mix. The culture in the organization also affects the competitive strategy, as it affects the consumer satisfaction.
5. Due Diligence: The main challenges faced in doing due diligence in acquisitions are aggressiveness and the need for quick results. Due diligence should involve integrating the infrastructure of the two companies. It is important to engage with the staff and make them feel at home. See what the company does better and try to adapt to that to make an overall better company. Companies should be able to get the best of the employees from the company being acquired and that is possible only with proper due diligence.
Top takeaways from ACG NY’s 2018 Healthcare eventPrepared by TresVista Financial Services—view full recap by clicking here
Sponsored by
7 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
5 Things You Missed
1. Traditional & Nontraditional Revenue Growth Strategies:Growth in revenue is achieved by numerous strategies such as implementing better technology, increasing the scope of the products and services offered, adding geographical expansion, etc. Achieving a meaningful, positive revenue growth is difficult, particularly in a flat GDP economy. It is very crucial to select the right business so as to achieve growth. Companies must build a good sales team to augment sales. A few nontraditional strategies involve the use of e-commerce and digital marketing. Some companies even go to the extent of building a technology team within the company. Achieving revenue growth in a company where it did not exist initially is the main challenge, but this revenue growth is sustainable.
2. Operational Strategies at the Portfolio Level: Looking at the portfolio level, it is crucial to adopt operational strategies to add value to the company. Hiring better talent to improve the aim and the outlook of the company is one of the main strategies. Supply chain, another very important factor, also influences the company’s success. E-commerce is a relatively new strategy to better the operations of the company. As the company depends on the management to run the businesses, the alignment between the management and the board is also extremely important.
3. Having Operating Partners for Value Addition:The partners contribute value to the firm if there is a proper alignment between the firm and the operating partners. The operating partners should also possess relevant industry experience to add value to the company. The board and management should work very closely with the operating partners so as to understand what they expect from the firm and set common goals to achieve.
4. Role of Outside Board Members: Unlike publicly listed companies, which have a fiduciary obligation for having outside board members, PE firms do not have any such obligations. Yet some PE firms have outside board members, as they bring perspective to the firms and help sequence the firm’s processes. They prioritize a sense of reality and reasonableness in the company. At times they even help facilitating better relations between the board and management.
5. Improvement of Performance Plan with the Management:There are three core elements:
• Transparency on the numbers
• Realistic expectation from the management
• Incentives aligned with the performance
Cutting costs is one of the strategies used to jumpstart the EBITDA. Other than that, sometimes it is important to take a step back, to resize or shrink down, to increase the EBITDA, and to improve the performance plan.
Top takeaways from ACG NY’s monthly event: Are you the best owner of your assets? Discover new ways to maximize portfolio company value! Prepared by TresVista Financial Services—view full recap by clicking here
Sponsored by
On February 13, we attended ACG New York’s monthly event, which discussed various means to add value to the Private Equityfirm’s portfolio. Here are five of our top takeaways from the panel, which focused on Value Addition in Private Equity Firms.Prepared by TresVista Financial Services
5 THINGS YOU MISSED LAST WEEK –
1Traditional and Non-Traditional Revenue Growth Strategies: Growth in revenue is achieved by numerousstrategies such as implementing better technology, increasing the scope of the products and services offered, addinggeographical expansion, etc. Achieving a meaningful, positive revenue growth is difficult, particularly in a flat GDPeconomy. It is very crucial to select the right business so as to achieve growth. Companies must build a good salesteam to augment sales. A few non-traditional strategies involves the use of E-Commerce and digital marketing. Somecompanies even go to the extent of building a technology team within the company. Achieving revenue growth in acompany where it did not exist initially is the main challenge, but this revenue growth is sustainable.
2Operational Strategies at the Portfolio Level: Looking at the portfolio level, it is crucial to adopt operationalstrategies to add value to the company. Hiring better talent to better the aim and the outlook of the company is one ofthe main strategies. Supply chain, another very important factor, also influences the company’s success. E-Commerceis a relatively new strategy to better the operations of the company. As the company depends on the Management torun the businesses, the alignment between the Management and the Board is also extremely important.
3Having Operating Partners for Value Addition: Operating Partners contributes value to the firm if there is a properalignment between the firm and the Operating Partners. The Operating Partners should also possess relevant industryexperience to add value to the company. The Board and Management should work very closely with the OperatingPartners so as to understand what they expect from the firm and set common goals to achieve.
4Role of Outside Board Members: Unlike Publicly Listed Companies, which have a fiduciary obligation for havingoutside Board Members, Private Equity firms do not have any such obligations. Yet some Private Equity firms haveoutside Board Members, as they bring perspective to the firms and help sequence the firm’s processes. They prioritize a sense of reality and reasonableness in the company. At times they even help facilitating better relations between theBoard and the Management.
5Improvement of Performance Plan with the Management:There are three core elements: ● Transparency on the numbers● Realistic expectation from the Management ● Incentives aligned with the performanceCutting costs is one of the strategies used to jumpstart the EBITDA. Other than that, sometimes it is important to takea step back, to resize or shrink down, to increase the EBITDA, and to improve the Performance Plan.
Sponsored By
8 PITCHBOOK & ACG NEW YORK PRIVATE EQUITY 1H 2017 IN REVIEW
5 Things You Missed
1. Changing Business Cycle:The economy is changing. The last business cycle ended over 10 years ago and the recovery started in March 2009, but this recovery has been very anemic primarily because the last recession was a credit-induced recession. The current cycle has also faced headwinds from the recent financial crisis, as evidenced by increased regulatory burdens, weak business sentiments, increased tax burdens and pushback on M&A, all of which burden the growth of the economy. However, policy initiatives have led to a change in business sentiments. With the acceleration of capital expenditures, wages etc., not only has the economy began to accelerate, but a policy initiative has added fuel to fire. Hence, 2018 is going to witness more policy-induced growth. According to Tim Hopper, founder of Macro Fund Advisors, “We are entering the more mature stage of the business cycle.”
2. Economic Variables & Interest Rates: According to Tim Hopper, the traditional measures of inflation haven’t risen much in the last few years due to the effects of decreased interest rates on asset prices. But the traditional measures will begin to reassert themselves later in 2018 and2019. The inverse relationship between interest rates and commercial property values, which was not existent for the past decade, will restart mostly in 2019. Additionally, portfolios might have to be realigned to account for the effects of the traditional rise in interest rate. 3. Buy a Business: The lowering tax rates will boost earnings in 2018, thereby providing a tailwind to the enterprise value. The impact of taking an effective tax rate from an average rate of ~23% down to ~18% translates to a 10%–20% earnings boost in 2018 and enterprise value boost of between 10%-15%. According to Tim Hopper, “People making transactions in the private sector should buy a business (mostly, automotive and real estate) since if you wait longer, you will have to pay more because of the increase in enterprise value.”
4. M&A and Tax Reforms: With the drop in the corporate tax rate, strategics will become more competitive in the M&A market. 2018 will continue to bring a fairly robust M&A market, as there is a lot of dry powder in the market. However, elevated valuations (median EBITDA multiple of ~10.0x), along with competitive advantage for strategic acquirers on account of lower rates, pose significant challenges. PE firms need to think about the complexity premium and act in ways which distinguish them from others, such as by taking businesses private.
5. New Technology Innovation:The automotive industry is in the third big innovation cycle of their century-old industry, as per Jiten Behl, Chief Strategy Officer at Rivian Automotive, because of intersection with technology. Statistics state that over $110 billion in capital has been infused in the last five years in the automotive industry due to innovation. Players from different industries are converging into the automotive space. But according to Pamela Hendrickson, COO and VP of The Riverside Company, the more tech enabled a business, the higher is the multiple and hence, specialty manufacturing and distribution industries seem to be more favorable given the lower multiples. Technology advancements have also led to PE shops focusing on their portfolio companies adopting these new platforms to grow their underlying business.
Top takeaways from ACG NY 2018 State of Union Luncheon event Prepared by TresVista Financial Services—view full recap by clicking here
Last week, we attended the ACG New York 2018 State of Union Luncheon event. Here are five of our top takeaways from the panel,which focused on the changing dynamics of the business cycle and M&A landscape of the US Economy.Prepared by TresVista Financial Services
5 THINGS YOU MISSED LAST WEEK –
1
Changing Business Cycle: The economy is changing. The last business cycle ended over 10 years ago and therecovery started in March 2009, but this recovery has been very anemic primarily because the last recession was acredit-induced recession. The current cycle has also faced headwinds from the recent financial crisis, as evidenced byincreased regulatory burdens, weak business sentiments, increased tax burdens, pushback on M&A activities, all ofwhich burden the growth of the economy. However, policy initiatives have led to a change in business sentiments.With the acceleration of capital expenditures, wages etc., not only has the economy began to accelerate, but a policyinitiative has added fuel to fire. Hence, 2018 is going to witness more policy-induced growth. According to TimHopper, Founder of Macro Fund Advisors, “We are entering the more mature stage of the business cycle.”
2Economic Variables and Interest Rates: According to Tim Hopper, the traditional measures of inflation haven’trisen much in the last few years due to the effects of decreased interest rates on the asset prices. But the traditionalmeasures will begin to re-assert themselves later in 2018 and 2019. The inverse relationship between interest rates andcommercial property values, which was not existent for the past decade, will restart mostly in 2019. Additionally,portfolios might have to be realigned to account for the effects of the traditional rise in interest rate.
3Buy a Business: The lowering tax rates will boost earnings in 2018, thereby providing a tailwind to the EnterpriseValue. The impact of taking an effective tax rate from an average rate of ~23% down to ~18% translates to a 10% –20% earnings boost in 2018 and Enterprise Value boost of between 10% - 15%. Tim Hopper – “People makingtransactions in the private sector should buy a business (mostly, automotive and real estate) since if you wait longer,you will have to pay more because of the increase in Enterprise value.”
4M&A and Tax Reforms: With the drop in the corporate tax rate, the Strategics will become more competitive in theM&A market. 2018 will continue to bring a fairly robust M&A market, as there is a lot of dry powder in the market.However, elevated valuations (median EBITDA multiple of ~10.0x), along with competitive advantage for Strategicson account of lower rates, pose significant challenges. The PE firms need to think about the complexity premium andact in ways which distinguish them from others, such as by taking private, etc.
5
New Technology Innovation: The automotive industry is in the 3rd big innovation cycle of their century-old industry,as per Jiten Behl, Chief Strategy Officer at Rivian Automotive, because of intersection of this industry withtechnology. Statistics state that over $110 billion capital has been infused in the last 5 years in the automotive industrydue to innovation. Players from different industries are converging into the automotive space. But according to PamelaHendrickson, COO and VP of The Riverside Company, the more tech enabled a business, higher is the multiple andhence, specialty manufacturing and distribution industries seem to be more favorable given the lower multiples.Technology advancements have also led to PEs focusing on their portfolio companies adopting these new platformsto grow their underlying business.
Sponsored BySponsored by
9 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
ACG NY Member Highlight: Anthony L. Caudle
ROLE & FIRM: Founder & CEO at RedTail Capital Markets LLC.
FOCUS: Investment Banking
Every month, we will feature an active member of the ACG NY community
in a brief interview. Reflecting industry insight and personal perspective,
this feature will introduce industry leaders and offer advice on the tools you
need to succeed in the ever-changing middle market.
1. Quick basics first, what is your role, firm and focus?
I am the founder and CEO of RedTail Capital Markets LLC. We are an SEC & FINRA-registered boutique investment bank. The firm provides various financial services, including corporate advisory, public and private
capital raising, equity and debt capital markets solutions, and M&A advisory. We cater to both corporations and private companies.
I recently completed my first year as a board member of ACG NY and the most recent Chair of the ACG NY Manufacturing Conference. I am currently in my third year as a member of ACG.
2. What do you think are the biggest obstacles in the middle market today?
I think pairing capital with the right deals in the marketplace continues to be critical. We look at multiple deals of all sizes,but those that are on the lower end of the spectrum—sub-$25 million in revenue—can provide great value. Awareness of particular industry sectors is critical as opposed to a non-industry focus approach. Perhaps there are some deals that are borderline in terms of acceptance, which can create great value over the long run as opposed to quickly writing the opportunity off up front. A greater industry knowledge along with a solid strategic developmental plan for some
investments are opportunities within the industry.
3. How has ACG helped you in your career?
Network, network, network. Need I say it any more? ACG has been a great platform to expand my network while providing greater distribution potential for deals that we bring to market in the private marketplace.
4. Can you tell us about your greatest success story/proudest achievement in association with ACG?
Creating a 100% minority-owned and operated FINRA & SEC investment banking firm. Creating a platform like RedTail Capital Markets, which helps to tackle the issues of diversity on Wall Street and is a bridge connecting high talent to a demanding and technical marketplace.
5. What changes do you foresee happening in the middle market in the next three to five years?
I think that the flow of capital from the public to private markets will continue. It continues to amaze many of us how this phenomenon has continued to evolve. Personally, I have been in the industry for 25 years and began my career primarily in the public markets and could not have imaged the amount of activities which take place today across multiple industries.
ANTHONY L. CAUDLEROLE/FIRM: Founder & CEO at RedTail CapitalMarkets LLC
FOCUS: Investment Banking
Every month, we will feature an active member of theACG New York community in a brief interview. Reßectingindustry insight and personal perspective, this feature willintroduce industry leaders and offer advice on the toolsyou need to succeed in the ever-changing middle market.
1. Quick basics - role/Þrm/focus?
I am the Founder and CEO of RedTail Capital Markets LLC. We are an SEC/FINRA-registered boutiqueinvestment bank. The Þrm provides various Þnancial services, including corporate advisory, public andprivate capital raising, equity and debt capital markets solutions, and mergers and acquisitions advisory.We cater to both corporations and private companies.
I recently completed my Þrst year as a board member of ACG New York and the most recent Chair of theACG New York Manufacturing Conference. I am currently in my third year as a member of ACG.
2. What do you think are the biggest obstacles in the middle market today?
I think pairing capital with the right deals in the marketplace continues to be critical. We look at multipledeals of all sizes, but those that are on the lower end of the spectrum sub $25 MM in revenue can providegreat value. Awareness of particular industry sectors is critical as opposed to a non-industry focusapproach. Perhaps there are some deals that are borderline in terms of acceptance, which can create greatvalue over the long run as opposed to quickly writing the opportunity off up front. A greater industryknowledge along with a solid strategic developmental plan for some investments are opportunities withinthe industry.
3. How has ACG helped you in your career?
Network, Network, Network. Need I say it any more. ACG has been a great platform to expand mynetwork while providing greater distribution potential for deals that we bring to market in the privatemarketplace.
4. Can you tell us about your greatest success story/ proudest achievement in association with
October Member Highlight - Anthony Caudle https://www.magnetmail.net/actions/email_web_version.cfm?recipie...
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10 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
ACG NY Member Highlight: Don Ritucci
ROLE & FIRM: Managing Director at Imperial Capital LLC
FOCUS: Investment Banking
Every month, we will feature an active member of the ACG NY community in a brief
interview. Reflecting industry insight and personal perspective, this feature will introduce
industry leaders and offer advice on the tools you need to succeed in the ever-changing
middle market.
1. Quick basics first, what is your role, firm and focus?
I am a Managing Director at Imperial Capital LLC and lead of our financial sponsors as well as our healthcare coverage effort. I have been with Imperial since 2011, and prior to that I was at UBS Securities for 13 years, spending most of my time in healthcare M&A. I have been a member of ACG NY since 2012, and have been on the board since September 2016.|
2. What do you think are the biggest obstacles in the middle market today?
Well, depending on what side of the coin you are on, some of the biggest obstacles are valuations and quality of assets available for sale, which is probably not surprising to many folks. Lots of capital (both debt and equity), low interest rates and lofty public equity market values will do this. We are seeing many “B” or below-rated assets commanding “A+” prices in sale processes, a trend that has continued for a while now. So if you are on the sell side, that’s good news. For those on
the buy side, it will be interesting to see how those investments pan out in the future.
3. How has ACG helped you in your career?
ACG has clearly helped me expand my professional network. Whether it be PE firms, other bankers, lenders, lawyers,accountants or other deal professionals, my network has absolutely exploded since becoming actively involved in ACG.
4. Can you tell us about your greatest success story/proudest achievement in association with ACG?
First thing that comes to mind is being the reigning champion for cornhole at the ACG New York Dealmaking on the Beach event, where I haven’t lost a match in two years. Other than that, I would say having rebuilt the dormant financial sponsor practice here at Imperial. Since I took over about five years ago, we have been involved in over 60 M&A advisory and debt financing transactions involving PE firms.
5. What changes do you foresee happening in the middle market in the next three to five years?
I wish I could tell you with some certainty what will happen over the next few weeks, never mind the next three to five years. That being said, trees do not grow to the sky, so I think its safe to say there will be some pullback and cooling off in that market during that time period.
DON RITUCCIROLE/FIRM: Managing Director at Imperial Capital LLC
FOCUS: Investment Banking
Every month, we will feature an active member of the ACG New Yorkcommunity in a brief interview. Reßecting industry insight and personalperspective, this feature will introduce industry leaders and offer adviceon the tools you need to succeed in the ever-changing middle market.
1. Quick basics - role/Þrm/focus?I am a Managing Director at Imperial Capital LLC and lead up of ourÞnancial sponsors as well as our healthcare coverage effort. I have been
with Imperial since 2011, and prior to that I was at UBS Securities for 13 years, spending most of mytime in healthcare M&A. I have been a member of ACG New York since 2012, and have been on theBoard since September 2016.
2. What do you think are the biggest obstacles in the middle market today?
Well, depending on what side of the coin you are on, some of the biggest obstacles are valuations andquality of assets available for sale, which is probably not surprising to many folks. Lots of capital (bothdebt and equity), low interest rates and lofty public equity market values will do this. We are seeing many"B" or below-rated assets commanding "A+" prices in sale processes, a trend that has continued for awhile now. So if you are on the sell side, thatÕs good news. For those on the buy side, it will be interestingto see how those investments pan out in the future.
3. How has ACG helped you in your career?
ACG has clearly helped me expand my professional network. Whether it be private equity Þrms, otherbankers, lenders, lawyers, accountants or other deal professionals, my network has absolutely explodedsince becoming actively involved in ACG.
4. Can you tell us about your greatest success story/ proudest achievement in association withACG?
First thing that comes to mind is being the reigning champion for cornhole at the ACGNew York Dealmaking on the Beach event, where I havenÕt lost a match in two years. Other than that, Iwould say having re-built the dormant Þnancial sponsor practice here at Imperial. Since I took over about5 years ago, we have been involved in over 60 M&A advisory and debt Þnancing transactions involving
November Member Highlight - Don Ritucci https://www.magnetmail.net/actions/email_web_version.cfm?recipie...
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11 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
ACG NY Member Highlight: Bobby Blumenfeld
ROLE & FIRM: Executive Director at ACG NY
Every month, we will feature an active member of the ACG New York community in a brief interview. Reflecting industry insight and personalperspective, this feature will introduce industry leaders and offer advice on the tools you need to succeed in the ever-changing middle market.
1. How long have you been an ACG Member?
In 1999, I saw an ad in Crain’s for an ACG NY meeting bringing financial professionals together. I was president of a national restructuring firm and wasn’t involved in networking associations prior to joining. Attending my first event, I met the President, David Cunn, who is now a managing director at JP Morgan Chase. David impressed upon me the importance of ACG in my career and asked me to join his executive committee. At that time, ACG NY had 175 members, and held nine yearly events, attended by 25 to 35 financial professionals.
BOBBY BLUMENFELDROLE/FIRM: Executive Director at ACG New York
Every month, we will feature an active member of theACG New York community in a brief interview. Reßectingindustry insight and personal perspective, this feature willintroduce industry leaders and offer advice on the toolsyou need to succeed in the ever-changing middle market.
1. How long have you been an ACG Member?
In 1999, I saw an ad in Crain’s for an ACG New Yorkmeeting bringing Þnancial professionals together. I wasPresident of a national restructuring Þrm and wasnÕtinvolved in networking associations prior to joining.
Attending my Þrst event, I met the President, David Cunn, who is now a Managing Director at JPMorgan Chase. David impressed upon me the importance of ACG in my career and asked me to join hisExecutive Committee. At that time, ACG New York had 175 members, held 9 yearly events, attendedby 25-35 Þnancial professionals
2. What roles have you played in ACG New York?
I served as both programming and membership chair and assumed the position of President from CalvinNavatto, now SVP at Marquette Commercial Finance, from 2003 to 2010. During this period, the chaptergrew from 175 members to 750 with approximately 40 annual events. After working in restructuring andinvestment banking in the 2000Õs, I made a career change. In 2010, I accepted the newly created positionExecutive Director of ACG New York. New York is now the largest chapter with over 1,000 membersand 70 annual events.
3. How has ACG helped you in your career?
ACG allowed me to bring together my years of experience and knowledge in management, Þnance,operations, sales, restructuring, and investment banking, focusing on the growth of the chapter andsupport of the middle market. ACG has strengthened my skills in strategic planning and leadership,positively impacting member networks, business development, and dealßow. Working with ACG NewYork chapter members and global leadership has provided me with a unique perspective of the middlemarket and a wealth of knowledge.
4. Can you tell us about your greatest success story/ proudest achievement in association with
January Member Highlight - Bobby Blumenfeld https://www.magnetmail.net/actions/email_web_version.cfm?ep=g...
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2. What roles have you played in ACG New York? I served as both programming and membership chair and assumed the position of president from Calvin Navatto, now SVP at Marquette Commercial Finance, from 2003 to 2010. During this period, the chapter grew from 175 members to 750 with approximately 40 annual events. After working in restructuring and investment banking in 2000s, I made a career change. In 2010, I accepted the newly created position of executive director of ACG NY. NY is now the largest chapter with over 1,000 members and 70 annual events.
3. How has ACG helped you in your career?
ACG allowed me to bring together my years of experience and knowledge in management, finance, operations, sales, restructuring, and investment banking, focusing on the growth of the chapter and support of the middle market. ACG has strengthened my skills in strategic planning and leadership, positively impacting member networks, business development, and deal flow. Working with ACG NY chapter members and global leadership has provided me with a unique perspective of the middle market and a wealth of knowledge. 4. Can you tell us about your greatest success story/proudestachievement in association with ACG?
My greatest success has been influencing ACG NY leadership and members in strategically focusing on new opportunities and growth. While I received both personal and chapter awards, my greatest achievement has been supporting my children Austin (now running his first congressional campaign), my daughter Victoria (currently on a one-year Fulbright teaching scholarship in Malaysia), and my wife Susan who is working in a non-profit teaching the next generation…helping others is a family business.
5. What do you think are the biggest obstacles in the middlemarket today?
The biggest obstacle I constantly hear is the imbalance in the supply side (sellers/quality deals) which has pushed up the multiples to new highs. Bulge-bracket PE firms have been moving down market in order to deploy capital. In many cases this is being done without fully realizing market differences and developing relationships through ACG, which would help them understand the marketplace and find new opportunities.
6. What changes do you foresee happening in the middlemarket in the next three to five years?
Your guess is as good as mine... Taking into account political and financial market stability, I can foresee the US, which will be in its longest period of expansion, facing much higher interest rates with LIBOR doubling during this period, driving up the cost of borrowing. In line with this thinking, a political or economic event could occur that could “close the window” on seller multiples and provide new opportunities for the buy side. Coupled with the aging of boomers, there will also be a greater number of sellers pushing multiples down to more reasonable levels.
It’s anyone’s guess on whether bitcoins will become a factor or if/when there will be greater international governmental controls put in place. I do see PE encompassing blockchain technology on the management and operational levels of their fund and portfolio companies in order to drive operationalvalue creation in their portfolio companies. The good news is, if 2008 was any indication, a downturn in the economy could lead to greater opportunities for PE firms and continued growth of ACG NY.
12 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
ACG New York | www.acgnyc.org | 212.489.8700
The Apawamis Club, Rye, NY11:00 AM - 8:00 PM
August 1 - 2, 2018 Ocean Place Resort & Spa, Long Branch, NJ
Please join ACG New York, ACG Philadelphia and ACG Boston for the Summer Dealmaking Conference - a networking event specifically targeted at deal–making professionals to provide high quality, relevant
deal-focused meetings.
The Summer Dealmaking Conference will be held in Long Branch, NJ at the Ocean Place Resort & Spa. Nestled between Pier Village and the Atlantic Ocean, Ocean Place is less than 60 miles from NYC and 75 miles from Philadelphia, with train service as well as a ferry that runs from NYC to
Atlantic Highlands.
Take Note: Independent Sponsors Are an Emerging Force in the MarketCompetition for PE transactions from independent sponsors is on the rise. As this emerging asset class of investors grows in size and power, it is gaining momentum in the market and searching for larger deals.
Who are independent sponsors? They are typically M&A professionals who have left a PE or investment banking firm to pursue deals on their own, without a formal fund behind them. Instead, they raise capital on a deal-by-deal basis. Independent sponsors may include family offices and executives with deep industry expertise looking for equity ownership in a business. They typically like to be more involved in a business than do traditional PE investors.
Many independent sponsors believe that their approach to investing gives them greater flexibility to pursue deals and allows them to have a greater alignment of interest with their limited partner investors. What’s more, an abundance of capital in the market has made it easier for independent sponsors to attract financing partners and raise money one deal at a time.
Lenders, in particular, should be attuned to the growing influence and deal acumen of independent sponsors. In the past, lenders shied away from independent sponsors because they did not have along track record of closing deals. But independent sponsors are proving to be quite resourceful, carving out a significant slice of deal flow for themselves and establishing a model of success that involves a keen understanding of the industries in which they operate.
Independent sponsors are adept at gaining the trust of target companies, spending months and months with the management team to learn about the business and forging deep relationships. It’s no surprise, then, that independent sponsor-backed deals are becoming more prevalent in middle-market transactions with values of $10 million to $75 million. And many of these sponsors are starting to move further upstream. For lenders, this means more deals that will require the use of debt.
A significant advantage for independent sponsors competing for deals is their natural appeal to business owners. Rightly or wrongly, many business owners still hold an outdated opinion of PE as corporate raiders intent on maximizing returns through financial engineering. By contrast, they see independent sponsors as real people they can personally connect with—not always the case with a PE firm, they believe.
PE firms, for their part, are beholden to investors who demand to see a return on their investments within a set timeframe. PE firms have about three to five years to put investments to work, a handful of years to grow their portfolio businesses, and a fixed period to exit those deals so they can raise their next fund.
Independent sponsors, however, operate under a different model. They can provide longer-term capital without limitations on how long they can hold onto their investment. They are not bound by certain structures to exit an investment quickly. That is a very attractive selling point for, say, a family-run middle-market business looking for capital.
Another advantage independent sponsors have is that family-run enterprises are eager to partner with family offices because they share commonalities in their approach to business. For instance, having an investor that truly understands how a family-run business operates can go a long way to contributing to the future success of the business.
The bottom line is that independent sponsors represent an increasingly important source of capital for private companies in the market. From a lender’s perspective, independent sponsors represent an emerging opportunity that they should seriously evaluate. From an investor’s perspective, independent sponsors represent a form of competition that deserves greater attention.
Claudine Cohen, Principal, Transaction Advisory Services
Claudine is a principal and leader in CohnReznick’s Transactional Advisory Services practice. She helps PE investors, alternative investment funds, lenders, and strategic investors with quality of earnings analyses, identifying revenue sources and profitability drivers, examining operating cost structures and sustainability factors, investigating business models including cash flow and financial projections, reviewing quality and realization of assets and liabilities, identifying working capital requirements and negotiating positions, and post-close working capital verification and adjustment mechanisms. She advises on buy and sell-side transactions including standalone platforms, carve-out of business segments, product line or facility, bankruptcy auction processes, mergers, and industry consolidations. To contact Claudine, email [email protected], or call 646-625-5717.
14 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
Supply Chain: EBITDA Accelerator or Inhibitor?Prior to the e-commerce movement, many considered the supply chain a second-tier operational cost driver most commonly
synonymous with corporate procurement functions. Today, it is typically the second-largest cost driver of any distributor business
model and, often, the most under-evaluated and under-capitalized function of a deal. Yet the supply chain can have a significant
impact on accelerating EBITDA in the first 100 days and beyond.
Globally, consumerism has rapidly developed an “order today, deliver tomorrow” expectation. While traditionally founded in retail
and consumer product markets, this expectation now transcends all industries, whether customers are purchasing clothing or drill
rig parts online. It requires investors to consider the significant shifts in capital and operating intensity necessary to meet the ever-
increasing demand upon the supply chain while designing and deploying deliberate and measurable performance improvement
strategies that capture valuation multiples early in the relationship.
Here are three pointers to ensure your supply chain gains the proper relevance in your investment strategy.
1. Supply chain evaluation as a deeper function of deal due diligence—Financial engineering during deal due diligence often
provides a nearsighted view of what is operationally required to fully leverage the supply chain and its impact on achieving
investor growth strategy. Understanding supply chain operational health and wealth early in the deal cycle, its ability to scale
and deliver to new markets quickly at a competitive price point, as well as the capital and resources required to do so will be
paramount in realizing the investment growth strategy.
2. Supply chain as a key value creation strategy component— When supply chain performance is influenced by multiple functions
in an organization, it can be difficult to attribute its true cumulative bottom-line impact. Today’s most prominent catalysts of
supply chain operational performance are marketing and logistics. It is important to analyze quick, free delivery implications,
including super-regional distribution points, technology alignment and automation, as well as the ability to pinpoint accuracy in
total landed cost. By valuing supply chain as a priority lever early in the acquisition cycle and funding supply chain engineering
and optimization to align with investment growth strategy, you can proactively transform its capabilities to deliver with ease,
speed and at a lower cost.
3. Supply chain resilience and sustainability— Beyond acquisition integration, supply chain designs should evolve with growth,
markets and economic volatilities. Older designs once operating at peak performance erode with time and require constant
monitoring and re-engineering to sustain the gains obtained from the initial supply chain investment.
Having proper operational practices and performance metrics across all supply chain functions impacting the organization
is critical for long-term sustainability and IRR maximization. Markets will continue growing at greater scale and with more
complexity to meet rising consumer demands. Logistics leaders should focus sharply on strategizing through due diligence
to remain resilient. Those who design agile supply chains can be better prepared to respond to an ever-changing industry
landscape.
Wendy Buxton is the President of LynnCo Supply Chain Solutions. She can be reached at [email protected]. Access Lynnco’s full four-part series, Supply Chain: EBITDA Accelerator or Inhibitor.
WHITEPAPER
WWW.LYNNCO-SCS.COM | +866-872-3264 | 2448 EAST 81ST ST, SUITE 2600, TULSA OK
SUPPLY CHAIN: EBITDA ACCELERATOR OR INHIBITOR?
Prior to the eCommerce movement, many considered the supply chain a second-tier operational cost driver mostcommonly synonymous with corporate procurement functions. Today, it is typically the second-largest cost driver ofany distributor business model and, often, the most under-evaluated and under-capitalized function of a deal. Yet thesupply chain can have a significant impact on accelerating EBITDA in the first 100 days and beyond.
Globally, consumerism has rapidly developed an “order today, deliver tomorrow” expectation. While traditionallyfounded in retail and consumer product markets, this expectation now transcends all industries whether customersare purchasing clothing or drill rig parts online. It requires investors to consider the significant shifts in capital andoperating intensity necessary to meet the ever-increasing demand upon the supply chain while designing anddeploying deliberate and measurable performance improvement strategies that capture valuation multiples early inthe relationship.
Here are three pointers to ensure your supply chain gains the proper relevance in your investment strategy.
1. Supply chain evaluation as a deeper function of deal due diligence — Financial engineering during deal due diligence often provides a nearsighted view of what is operationally required to fully leverage the supply chain and itsimpact on achieving investor growth strategy. Understanding supply chain operational health and wealth early in thedeal cycle, its ability to scale and deliver to new markets quickly at a competitive price point, as well as the capitaland resources required to do so will be paramount in realizing the investment growth strategy.
2. Supply chain as a key value creation strategy component — When supply chain performance is influenced bymultiple functions in an organization, it can be difficult to attribute its true cumulative bottom-line impact. Today’smost prominent catalysts of supply chain operational performance are marketing and logistics. It is important to analyze quick, free delivery implications, including super-regional distribution points, technology alignment and automation, as well as the ability to pinpoint accuracy in total landed cost. By valuing supply chain as a priority leverearly in the acquisition cycle and funding supply chain engineering and optimization to align with investment growthstrategy, you can proactively transform its capabilities to deliver with ease, speed, and at a lower cost.
3. Supply chain resilience and sustainability — Beyond acquisition integration, supply chain designs should evolve with growth, markets, and economic volatilities. Older designs once operating at peak performance erode withtime and require constant monitoring and re-engineering to sustain the gains obtained from the initial supply chain investment.
Having proper operational practices and performance metrics across all supply chain functions impacting the organization is critical for long-term sustainability and IRR maximization.
Markets will continue growing at greater scale and with more complexity to meet rising consumer demands. Logisticsleaders should focus sharply on strategizing through due diligence to remain resilient. Those who design agile supplychains can be better prepared to respond to an ever-changing industry landscape.
Wendy Buxton is the President of LynnCo Supply Chain Solutions. She can be reached at [email protected]. Access Lynnco’s full four-part series, Supply Chain: EBITDA Accelerator or Inhibitor.
15 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
What to Consider When Buying a Blockchain CompanyAccording to PitchBook, 23 M&A deals in the blockchain and cryptocurrency space closed in 2017.
Within the first month of 2018, five more deals closed. While most of the 2017 transactions occurred between industry
participants due to consolidation, increasingly, other companies are evaluating the many potential benefits of blockchain
technology, particularly companies that engage in extensive transaction recording, such as those in the financial services,
shipping and logistics, and data protection industries. A potential acquirer of a blockchain technology company should carefully
consider whether the technology will be a true strategic fit or whether a more established, existing technology could achieve the
same goals and should carefully diligence issues of nontraditional capital generation before signing an acquisition. In addition,
the acquirer will need to understand the capital and financing structure of these often uniquely financed companies. Although
blockchain technology has been tested as the solution for any number of problems—from the United Nations’ World Food
Program using it to provide food vouchers to Syrian refugees to the Louis Dreyfus Co. using it to trade a cargo of US soybeans to
China—the technology is still in its development stage. Companies are testing the technology through individual pilot programs,
but, at the moment, no company outside of the blockchain industry has converted its entire logistics department or trading
platform to run solely on a blockchain-based system. A company interested in acquiring blockchain technology should consider
the following questions to help it determine whether the technology is a strategic fit for the company and whether the acquisition
makes sense for the company’s long-term strategy:
1. Is the product or service that the company offers something that needs a faster, more secure, immutable method of
recordkeeping? These are the attributes that make blockchain technology more attractive than traditional technology. If these
attributes are not helpful for a company, it may not make sense to invest in blockchain technology.
2. Are there alternative, already-established technologies that the company could use instead of blockchain technology? As
discussed above, blockchain technology is still under development. A company may find that there are alternative technology
solutions that already exist and may be as good or better for the company’s needs than a blockchain-based solution. By using
already-existing technologies, companies could avoid some of the risk that often comes with adopting a new technology.
3. Is the company comfortable with an acquisition that may involve nontraditional issues, such as token sales or cryptocurrency
funding? Blockchain companies often engage in nontraditional funding and revenue generation methods, such as token sales or
cryptocurrency funding. If a blockchain company has conducted a token sale, it is important that the acquirer know how the sale
was conducted, whether it was conducted in compliance with US securities laws, and to whom the tokens were sold. If a company
has accepted cryptocurrency investments, it is important to know how those investments are stored, as there is currently no
banking protection for stolen cryptocurrency. In addition, an acquirer should know what kind of cryptocurrency was accepted
and have a way to track any value fluctuation the cryptocurrency may experience during the acquisition period. Finally, for both
token sales and cryptocurrency investments, the acquirer should have a clear understanding of how the company records these
items in its accounting.
Companies may see value in acquiring a blockchain technology business, but these acquisitions should be reviewed and
diligenced carefully to ensure that liability issues unique to blockchain companies have been fully disclosed and that the
acquisition is a strategic fit for the acquirer.
Johanna R. Collins-Wood, Attorney—Pepper Hamilton LLP is a member of Pepper’s Blockchain Technology Group and is active in the overall fintech space advising US and international public and private companies, PE, VC and blockchain-based clients.
16 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
2018 Outlook: Middle-Market M&A CommentaryToday’s “water cooler talk” often focuses on the strength of the M&A markets and the length of the current cycle. We’re certainly
having those conversations and our conclusions are likely similar to many of yours—that the middle market will continue to show
teeth in terms of both M&A volume and value in 2018, but that we’re all waiting for the other shoe to drop (or maybe the first
shoe…). Perhaps most relevant to the current discussion isn’t the relative strength of the market, per se, but instead the specific
factors that are keeping the proverbial shoe from dropping in 2018. Our expectation that 2018 will be a strong year for middle-
market M&A is bolstered by the followed key factors:
1) Volatile Markets Won’t Rile the Fundamentals—February 2018 saw global equity markets swing wildly, with all major averages
down more than 10%, placing them in correction territory. Investors experienced volatility like never before with the CBOE
Volatility Index (VIX) spiking to over $35 from its sustained lows of under $10 in January 2018. While the markets appear to have
stabilized, the volatility reminds all investors that the current pace of equity appreciation will not continue indefinitely. Despite
this, economic fundamentals remain strong. Earnings growth, consumer confidence, wage growth, strong employment and
production activity suggest our economy’s foundation is strong. These latter factors, not equity market volatility, will keep M&A
moving at a brisk pace in 2018.
2) Buying, Not Building—Buyers will favor acquisitions as the preferred method of adding strategic capabilities in 2018 rather
than home grown efforts to add similar capabilities. M&A can effectively fill key capability gaps in technology, human capital,
product/service offerings, customer acquisition or geographic coverage. Many buyers are willing to pay a full or premium multiple
for known/proven assets and we expect this to continue in earnest in 2018, supported by ample capital availability and strong
corporate balance sheets.
3) Demand for M&A Persists—A consequence of a long, healthy economic cycle is that organic growth rates, generally, are tepid.
In order to achieve growth targets and drive enterprise value, companies will need to turn to M&A to accelerate top- and bottom-
line growth. The passing of the tax reform act at the end of 2017 added to an already strong corporate balance sheet dynamic,
allowing companies to repatriate cash and increase cash flow available for investment (due in large part by lower effective tax
rates, the magnitude of which is dependent on entity structure). PE also experienced a healthy fundraising year, adding to their
dry powder to pursue acquisitions. The result is a healthy demand from the buy side for businesses being marketed for sale.
4) Inflation Likely Won’t Predominate—Wage and CPI growth released in February indicate we’re moving into a period of inflation
we haven’t seen in some time. The Federal Reserve is indicating multiple rate hikes throughout the year, the number of which
is up for debate with consensus expectations of three to four rate hikes in 2018. As data is released supporting an inflationary
environment, it’s likely there will be more, not fewer rate hikes. While this dynamic increases the cost of debt capital, we don’t
expect the change to meaningfully temper the financing behavior for M&A. Interest rates are still historically low, and lower return
expectations have built their way into buyer financial models over the past couple years. We don’t expect an elevated yield curve
to meaningfully change buyer behavior this year.
Joe Wagner is a director of PMCF and co-leads PMCF’s Industrials team. PMCF is a middle-market investment banking firm offering sell-side, capital-raising, strategic consulting advisory services to institutionally and non-institutionally owned companies in the Industrials, plastics & packaging, medical technology, tech-enabled business services and consumer & retail industry segments. PMCF has offices located in Chicago and Detroit, and internationally through Corporate Finance International™.
17 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
2018 M&A PredictionsThe rapid rise of artificial intelligence (AI), machine learning and robotics is transforming every industry, while changes in tax
laws and financial regulations create potential new opportunities around the world. In 2018, deal numbers are likely to pick up as
interest rates begin to rise, however, the M&A sector will continue to face uncertainty.
A few more specific predictions:
1. US tax reform – how will companies spend their cash windfall?
The passing of the tax reform bill last year by Congress alleviated the uncertainty surrounding the legislation, which had created
a backlog on deals postponed in 2017. In 2018, buyers and sellers will benefit from greater clarity on the legislation, enabling them
to make more informed decisions on potential deals.
In addition, corporate tax cuts and the inducements to repatriate funds parked in offshore subsidiaries could result in US
companies using funds to spur growth through acquisitions, and particularly within the domestic market. Our prediction is that
prices will go up and therefore companies will need to be careful not to overpay.
2. Protectionism turning the world upside down…again
In 2018, the UK can expect more clarity on whether or not Brexit will be an amicable or cliff-edge separation for Britain, and
more clarity on its future impact on the M&A market. We predict an increase in UK M&A deal activity, as organic growth remains
challenging and international investors continue to capitalize on a weakening pound and an abundance of cheap financing.
Meanwhile, France is facing down unions and might allow the takeover of companies previously viewed as strategic assets.
In a strange role reversal, China is loosening foreign investment restrictions while the US increases them with greater regulatory
scrutiny on mega-deals in similar industries. We are likely to see outbound investments from Chinese companies picking up this
year, especially in infrastructure and natural resources, which align with China’s Belt and Road Initiative.
3. Technology deals at any price: Damned if you do, damned if you don’t
Half of M&A deals involving technology targets in the last three months of 2017 were made by non-tech acquirers. In 2018,
companies will continue to buy rather than build in order to acquire needed technologies and capabilities. The rapid pace of tech
acquisitions has pushed up prices, but this is unlikely to deter buyers in 2018, who will continue to see some targets as must–have
assets. Retention budgets will likely have to increase to ensure organizations get the best return on their investments in human
capital.
4. More media deals: Europe in the crosshairs
Media has long been a hot sector for M&A, with a stream of headline-grabbing deals led by the US over recent years now
starting to hit regulatory restrictions. The US is an increasingly difficult target market, but we can expect to see a pickup in pace
elsewhere if deals in this sector continue to make economic sense. With its fragmented media market, Europe would seem the
natural place to watch. While the array of choice has been expanding, markets seem fairly saturated and a wave of consolidations
seems imminent.
Jana Mercereau, is Head of Corporate Mergers & Acquisitions for Great Britain, Willis Towers Watson
18 PITCHBOOK & ACG NEW YORK 2017 PE IN REVIEW
April 10, 2018 ACG NY Forward Networking Reception
April 11, 2018 ACG NY International Event at the Hungarian Consulate
April 12, 2018 Women of Leadership & WAVE Mixology & Networking Event
April 17, 2018 Monthly Luncheon Meeting & ACG Cup; Cannabis - The New Investing Frontier
April 17, 2018 Lender/PE/IB Dinner at Claudette - Invitation Only
April 19, 2018 ACG NY Family Office Breakfast Meeting
April 27, 2018 Tax Reform: What it means for your PE deals and beyond
May 2 – 4, 2018 InterGrowth® 2018
May 9, 2018 Monthly Luncheon Meeting; Doing Well By Doing Good – How Family Offices
Invest for Impact & Financial Return
May 18, 2018Westchester Breakfast Meeting: Health Care Deals 2018: Where Have We Been
and Where Are We Going?
May 21, 2018 14th Annual Golf Outing
May 30, 2018 PE to PE Dealsource Event 2018 - Invitation Only
June 12, 2018 Grand Prix
June 21, 2018 8th Annual Champion’s Awards
August 1 – 2, 2018 Summer Dealmaking Conference
November 28, 2018 16th Annual PE Wine Tasting – Featured Event
Event Calendar2018Visit www.acgnyc.org for a full calendar of events
1
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the board. States have been losing
revenue, and accordingly are making
individual calls. They are justified, after
all — they are only collecting on a tax
that currently nobody pays.
Why do high-growth companies face
bigger challenges than others?
As mentioned earlier, there has been
a significant shift in the past several
years when it comes to favoring
staying private for as long as possible.
That has contributed to the explosion
in the number of highly valued,
venture-backed private companies
that garner multiple headlines,
whether within the context of the
venture industry or merely for their
impact upon traditional industries. But
the fact of the matter is high-profile
companies will typically be targeted
for audit first. One of the trends we
see when we speak with state auditors
is that, as they determine which
businesses to pursue, they’ll look to
get a sense of customer segments and
evidence of those customers paying
sales tax. Given the inroads made by
relatively younger businesses into
more staid, traditional industries such
as enterprise software, there can be
double exposure on the part of the
new, fast-growing businesses that
are dominating headlines for their
transformative offerings, particularly
if they’ve been especially disruptive.
Let’s use Amazon as an example.
New York’s Amazon Law remains
one of the more infamous examples
of “click-through nexus”: Part of that
was because brick-and-mortar chains
fought hard to level the playing field
when it comes to ecommerce and
collection of sales tax. What that did
was end up incentivizing Amazon to
open up regional producers closer to
their customers in a given jurisdiction
so they’d be able to reap the
advantages of geographic proximity
With more attention being placed
on recovering sales tax revenue at
the federal and state level, why isn’t
it getting easier for companies to
address these issues?
Many companies view not paying sales
tax as a competitive advantage and
consequently are finding it difficult to
adjust. For a long time, it was simply
the case that nobody paid the tax,
even though it was on the books. But
now, states are looking to recoup
millions of dollars in uncollected sales
tax from ecommerce transactions.
Auditors are like anyone else — they
want to go out and find low-hanging
fruit. States view every such sales tax-
collecting issue as a potential nexus
situation, i.e. a case in which the target
company needs to prove whether
or not their presence is significantly
physical and thereby comes under the
determination of nexus as assessed
under the due process and commerce
clauses in the US Constitution.
When it comes to software and
services beyond retail alone, things
become considerably muddier. With
the recent decision by the Supreme
Court to turn down an appeal
challenging Colorado’s notice and
reporting regime — which requires
remote retailers to report in-state
sales to the Department of Revenue
and notify customers of their use tax
obligations — more states are likely to
jump on the bandwagon and adopt
similar proposals.
Adding to the difficulty, more and
more states are adopting a newer
definition of economic nexus when
it comes to sales tax to increase the
number of merchants eligible to
collect from buyers. Such measures
can depend solely on annual sales
as a metric. For example, Ohio has
Pat FalleChief Evangelist [email protected] ext. 1466
“People don’t look at it this way, but there’s no such thing as a free sales tax.”
adopted a “factor presence test” for
determining what companies are
subject to the Commercial Activity Tax.
This basically means that businesses
with no connection at all to Ohio are
subject to the CAT if they have sales in
Ohio of at least $500,000.
Individual states are pursuing or
implementing their own initiatives
as, frankly, the federal government
has been sluggish about adopting
federal remote sales tax legislation,
which would standardize sales and use
tax collection and remittance across
Avalara’s Chief Evangelist on how to
adapt
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+1.206.336.5710
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the board. States have been losing
revenue, and accordingly are making
individual calls. They are justified, after
all — they are only collecting on a tax
that currently nobody pays.
Why do high-growth companies face
bigger challenges than others?
As mentioned earlier, there has been
a significant shift in the past several
years when it comes to favoring
staying private for as long as possible.
That has contributed to the explosion
in the number of highly valued,
venture-backed private companies
that garner multiple headlines,
whether within the context of the
venture industry or merely for their
impact upon traditional industries. But
the fact of the matter is high-profile
companies will typically be targeted
for audit first. One of the trends we
see when we speak with state auditors
is that, as they determine which
businesses to pursue, they’ll look to
get a sense of customer segments and
evidence of those customers paying
sales tax. Given the inroads made by
relatively younger businesses into
more staid, traditional industries such
as enterprise software, there can be
double exposure on the part of the
new, fast-growing businesses that
are dominating headlines for their
transformative offerings, particularly
if they’ve been especially disruptive.
Let’s use Amazon as an example.
New York’s Amazon Law remains
one of the more infamous examples
of “click-through nexus”: Part of that
was because brick-and-mortar chains
fought hard to level the playing field
when it comes to ecommerce and
collection of sales tax. What that did
was end up incentivizing Amazon to
open up regional producers closer to
their customers in a given jurisdiction
so they’d be able to reap the
advantages of geographic proximity
With more attention being placed
on recovering sales tax revenue at
the federal and state level, why isn’t
it getting easier for companies to
address these issues?
Many companies view not paying sales
tax as a competitive advantage and
consequently are finding it difficult to
adjust. For a long time, it was simply
the case that nobody paid the tax,
even though it was on the books. But
now, states are looking to recoup
millions of dollars in uncollected sales
tax from ecommerce transactions.
Auditors are like anyone else — they
want to go out and find low-hanging
fruit. States view every such sales tax-
collecting issue as a potential nexus
situation, i.e. a case in which the target
company needs to prove whether
or not their presence is significantly
physical and thereby comes under the
determination of nexus as assessed
under the due process and commerce
clauses in the US Constitution.
When it comes to software and
services beyond retail alone, things
become considerably muddier. With
the recent decision by the Supreme
Court to turn down an appeal
challenging Colorado’s notice and
reporting regime — which requires
remote retailers to report in-state
sales to the Department of Revenue
and notify customers of their use tax
obligations — more states are likely to
jump on the bandwagon and adopt
similar proposals.
Adding to the difficulty, more and
more states are adopting a newer
definition of economic nexus when
it comes to sales tax to increase the
number of merchants eligible to
collect from buyers. Such measures
can depend solely on annual sales
as a metric. For example, Ohio has
Pat FalleChief Evangelist [email protected] ext. 1466
“People don’t look at it this way, but there’s no such thing as a free sales tax.”
adopted a “factor presence test” for
determining what companies are
subject to the Commercial Activity Tax.
This basically means that businesses
with no connection at all to Ohio are
subject to the CAT if they have sales in
Ohio of at least $500,000.
Individual states are pursuing or
implementing their own initiatives
as, frankly, the federal government
has been sluggish about adopting
federal remote sales tax legislation,
which would standardize sales and use
tax collection and remittance across
Avalara’s Chief Evangelist on how to
adapt
4 PITCHBOOK & AVALARA INDUSTRY BRIEF
White paperShare your industry knowledge
with an 8-12 page report that
combines custom content with
our data and analysis. Using
your firm’s approach to a topic
as a framework, the report
breaks down an industry vertical
through a complete overview of
market trends.
Report sponsorshipSponsor one of our 50+ reports—
the go-to source for dealmakers
seeking industry insight—to
showcase your expertise and
reach a half million influential
professionals. Report sponsorship
packages can include full-page
ads, company bios, industry briefs
and more.
Andrew Doherty
Director of Advertising & Sponsorships
+1.206.336.5710
For details and pricing, contact:
PG 1
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