Opinion Direct lending

Randy Schwimmer

Amid the startling rise in buyouts and capital markets activity concurrent with the pandemic, much attention has been paid to financing drivers. Less focus was on the prime movers of that volume; namely, M&A. That no doubt accounts for the presence of over 500 registrants at last month’s Lead Left Presents webinar featuring four top middle market investment bankers discussing trends.

The Fed’s massive injection of capital boosted equities in 2020, which brought courage to private capital investors. Significant dollars on corporate balance sheets and piles of private equity dry powder then continued to fuel growth via M&A. The supply/demand imbalance of capital outweighing investment opportunities is expected to continue in 2022.

The great stay-at-home impacted auction processes. Buyers were choosing their spots, but those remaining had high conviction. Two paths for processes were identified. The first was to allow curated and early access to management teams and due diligence. Broader entrance to the buyer funnel was allowed when a business was more bespoke or valuation less obvious.

There has been a new dynamic on prices because buyers were either committed or getting out of the way. Some companies found it hard to gain buyer attention, but buyers who showed interest could pay higher multiples. 2021 featured substantive conversations between bankers and sponsors to keep buyers engaged.

The role of the banker has changed

“This was a market where businesses were sold, not bought,” says one market participant. It was critical to be thoughtful up-front to give selected buyers confidence or lose control later.

From a sector perspective, industrials were challenged in 2020, then bounced back sharply last year. Backlogs were very strong going into 2022. Covid highlighted increased labour costs and motivated businesses to ramp up automation. Other pandemic winners included water filtration and air purification.

Covid spiked growth in some areas. Which ones will return to earth and which are sustainable? Technology and software are eating the world by digitising everything. Typical commercial and industrial buyers are aggressive in tech and software just to stay where they are.

The consumer focus is on health, as dollars shifted early from travel and hospitality to home, pet, outdoor sports and healthy living. Other industries with momentum are third-party logistics, transportation, after-market auto parts, and healthcare. Pre-covid value-creation by sponsors came from cost containment and margin improvement; post-covid that enhancement has emerged from revenue generation.

What about headwinds?