Global credit funds & CLO's
September 2020
| Issue 227
Published in London & New York.
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Direct lending
Randy Schwimmer
Lenders aren’t as adventurous, but they realise if they don’t act now, 2020 will be a lost year
Head of capital markets and origination
Churchill Asset Management
September 2020 | Issue 227
Six months into the coronavirus pandemic, investors are searching for the ‘new normal’ for businesses. Unfortunately, as a recent Accenture study stated, “normal isn’t available to us anymore”. With every aspect of life upended, identifying new consumer and commercial trends demands that investors change their mindsets.
The same goes for analysing deal activity. Tracking loan volume is only part of the picture. It’s also revealing to look upstream at M&A flow. How buyers and sellers of companies — and the firms advising them — are behaving and interacting is key to understanding the new world of deal-making.
The beginning of the crisis caught players flat-footed. “Of the deals we had in the shop when the music stopped in early March, roughly 80% were put on hold,” one source tells us. “Things came to a screeching halt. It has climbed back up, and we’re seeing a good amount of activity, but it’s still half of what it was.”
With so much uncertainty surrounding monthly performance, most businesses hit by covid-19 are not saleable. Those that grew through the crisis with no budget tweaks found their purchase price multiples to be at or higher than pre-covid levels. Essential services remain highly prized and are priced at a premium.
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Getting used to longer deal processes
Bankers point to what appears to be the next stage of the crisis. “We’re past the panic point,” one reports. “There’s been a re-instigation of the market. Deal flow now is the ultimate definition of what’s good.”
But even getting good deals is logistically challenging. “The time to market will inevitably elongate,” a top middle market adviser says. “Buyers and sellers need more time to assess the coronavirus impact. The ramp-up in cases in some areas could stall the market.”
Other constraints like travel restrictions and quarantines present moving hurdles, further slowing timelines and hindering investors’ ability to conduct due diligence. It’s also tough to build rapport with buyers. Zoom helps, but few sponsors would invest in a platform without a personal meeting.
Unlike the last several years, political considerations could be motivating sellers. One study estimated the differential imposed by a new administration’s tax plan could cost a seller up to three times ebitda. There are also unknown unknowns. As happened after 9/11 and the financial crisis, founders of middle market companies are evaluating more urgently the need for a business and financial partner.
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Bankers, private equity firms and corporate lenders are all looking for new ways of doing business
Financing becomes more complicated
The current climate also makes financing deals trickier than normal. “There are lots of twists and turns,” says another advisor. “You don’t want to run a big process. Having dozens of lenders talking to each other is not a path to success. Make sure the incumbent agent is involved early and can write a big ticket. Then work with the existing lender group to fill in the rest.”
Despite the ups and downs of the economy, liquidity is available for the right borrowers. Lenders aren’t as adventurous with terms and hold levels, but they realise if they don’t act now, 2020 will be a lost year.
Private equity sponsors are also adapting. “We historically focused on six sectors,” the partner of a top middle market firm said recently. “Two have been swept away. We’re still getting books on them, but we’re running with traction areas.”
Businesses traditionally protected during recessions — for example, low-cost fitness centres — have been slammed with shutdowns. Others with little or no growth coming into the crisis (such as print catalogues) have flourished as consumers’ attention shifts closer to home.
Software, tech and B2B — away from the consumer frontlines of retail, restaurants, travel and leisure — are showing steady numbers. Some healthcare has fared well, but not all. Patient-facing sectors such as physician practice management companies slumped sharply as in-office visits were curtailed.
“We’re not in a stasis,” one advisor concludes. “We’re not going back to that. This is a search for new paradigms.”
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