In this session, Stephanie McCann, Partner and Co-Head of McDermott’s Finance Practice Group, and Frank Steinherr, Partner and Co-Head of McDermott’s Private Equity Practice Group, hosted a discussion that explored strategies for value creation for equity and debt investors. Session panelists included:
Alex Greeley, Partner, Linden Capital Partners
Ilya Koffman, Managing Partner, Turnspire Capital Partners
Dan Lee, Partner, Comvest Partners
Seth Pearson, Managing Director, Private Equity, York Capital Management
Below are key takeaways from the discussion:
During a discussion about the impact of rising interest rates, inflation and geopolitical uncertainty affecting the current “seller’s” market in M&A, it was said non-economic terms may shift towards buyers; however, they also said they expect pricing and EBITDA multiples to remain seller-friendly given the unprecedented amount of capital competing for a finite number of potential deals. Some panelists agreed with that perspective and indicated that they were surprised that markets had not yet corrected more. It was added that they expect recessionary concerns to be built into the underwriting process for new financings going forward to ensure new credits can withstand a potential recession.
Panelists said sponsors must bring subject-matter expertise to drive value creation in today’s competitive market. They said that such expertise is often supplied through the connections and relationships a sponsor can provide with industry experts and operational advisors to provide improvements around the margins and increase efficiency in existing operations.
During a discussion about whether lender co-investment helps to align the interests of sponsors and lenders in terms of value maximization, a panelist said they don’t believe such co-investments make a meaningful difference because the small return on the equity co-investment in relation to the size of the facility is not enough for lenders to change their view on a particular business. In their view, value maximization is a byproduct of transparency between sponsors and lenders with respect to the health of a particular business. They added that the market is trending towards transparency and away from the old-school view that lenders should receive only the information they are contractually obligated to receive. There was agreement that transparency is critical in today’s market and they noted that transparency should also extend to the lender in their belief in a company so that a sponsor can accurately assess the situation. They discussed the role that providers of junior capital can play in helping to drive value creation via alignment of sponsor and lender interests through products like preferred equity paper and Holdco PIK notes. It was added that junior capital can provide buyers with a turn or more additional leverage when competing to purchase assets at high valuations.
One panelist noted they anticipate large companies will divest underperforming segments of current operations if the current market downturn continues, and they identified carve-out transactions as a place for buyers to drive value creation. In their view, sponsors that can identify the root causes of underperforming businesses will have an opportunity for high returns on carve-outs.