WEBINAR TRANSCRIPT
Allan Siegert:
I am Allan Siegert of Navatar and I am excited, we’ve got a great panel. With us today are four leaders of prominent middle market M&A companies. And along with me is a co-moderator representing private equity GPs. We’re going to be talking about deal sourcing friends and hey, we’ve got some interesting numbers about deal sourcing from a highly respected source: our number crunching friends at Sutton Place. We’ll talk about best practices during auctions and how technology is changing deal sourcing. Speaking of technology, a brief word about Navatar. We are a connected growth platform that supports M&A, private equity, strategics and placement agents, along with a deal network and an investor portal. We have 600 clients in 35 countries. We are coming to you today from our headquarters in New York. So let’s kick this off by introducing the panel. Starting with our co-moderator Martin Stein who is in beautiful Grand Rapids Michigan. Hello Martin, what should the audience know about you and Blackford?
Martin Stein:
Thanks Allan, great to be here. I’m the founder and Managing Director of Blackford Capital. We are a 15-year-old private equity firm focused on the lower middle market. We do exclusively majority control buyouts of family-owned industrial businesses. We look at companies with $20 million to $100 million in revenue, $2 million to $10 million dollar in EBITDA, and typically $10 million to $75 million in transaction value. We have been fortunate to be awarded deal of the year for the last 3 years in Michigan and the M&A Advisor Award.
Allan Siegert:
That’s great Martin. Next let’s hear from Bruce Cameron who is the CEO of Berkshire Capital here in New York. Good Morning Bruce.
Bruce Cameron:
Thanks very much. My name is Bruce Cameron, I am the President and CEO of Berkshire Capital. We are a 30-year-plus old investment banking boutique with offices in New York, Denver, San Francisco, London and Sydney. Our focus is on financial services, M&A and advisory, particularly in the asset management securities area. We have about 40 people. Part of what we bring to the table is a global reach with our long history and transactions that have tended to stick. We take a great deal of pride putting together transactions that have worked over the long term. We’ve done over 300 transactions in our sector.
Allan Siegert:
Thanks Bruce. Our next panelist is coming to us from Hamburg, Germany. Ulrich Schneider, he is a partner at Proventis Partners. Hello Ulrich and good afternoon.
Ulrich Schneider:
Thanks Allan. My name is Ulrich Schneider and I am a partner at Proventis Partners. We are an European M&A advisory boutique. We have offices in Hamburg, Munich and as well as in Zurich. We have 30 employees and we focus on mid-market M&A, divestitures and corporate finance projects; and we have a sweet spot somewhere between €20 and €60 million euros. About 60 to 70 percent of all our transactions are cross-border in nature and we deal with private equity firms mostly from Europe but also from overseas as well as large corporate and famil- owned businesses.
Allan Siegert:
Thanks Ulrich. Back in New York, we are joined by Timothy Page who is Managing Partner of Whitehall and Company. Welcome to the webinar Tim.
Tim Page:
Thank Allan. I am the founding partner and the Managing Partner at Whitehall. I have been an investment banker for over 20 years. I am currently in charge of capital markets out of Whitehall’s business. Whitehall is an investment bank in mid-town New York that specializes in M&A, advisory, debt placement and equity placement. We are best known for our expertise in the project finance sector and within that the energy markets. In the past 24 months we placed about $6 billion in private securities in the debt and equity markets.
Allan Siegert:
Thanks a lot Tim. Finally we’ve got David Mahmood with us from Dallas where he is the Chairman of Allegiance Capital. David thanks so much for joining us today.
David Mahmood:
Thank you Allan. I am Chairman and Founder of Allegiance Capital Corporation. A serial entrepreneur, this is the eighth company I have started from scratch. Allegiance Capital is 18 years old, headquartered in Dallas with offices in New York, Chicago, Minneapolis and Monterrey, Mexico. We build ourselves as a marketing company that does investment banking. We have a very strong marketing capability in generating deal flow. Our core competency is the sale of privately held and closely held companies. We also provide financing for these companies and growth opportunities by providing them with acquisitions. Our sweet spot are companies that have adjusted EBITDAs from $5 million to $50 million. We have a proprietary database of 130 thousand names in North America that we consistently contact about four times a year, as you never know when they’re going to have that significant emotional event and decide to sell.
Allan Siegert:
So let’s get started with trends and some new data from Sutton Place. Looking at more than 10 million deals from last year in the US and Canada. It looks like M&A firms were involved in 65 percent of them. The larger the deal, the more likely M&A is involved. Tim is that number higher or lower than you expected and why?
Tim Page:
I would to have to say that it’s lower than I would expect. I would expect that number to actually be a bit higher and I think the trend would be that it would increase in the coming years. Part of the reason why is that the world is becoming more and more specialized. Investors have less and less time to go out and do original deal flow because they’re doing what they should be doing, which is what they are best at and that is deal analysis and due diligence. So what investors appreciate is an intermediary being involved to help save them the legwork of actually going out through that origination as well as providing an initial screen of the transaction.
Allan Siegert:
Martin, what’s your sense of it? Is the number surprising to you?
Martin Stein:
Yes. Below $10 million dollars, my suspicion is that very few intermediaries are involved. But I think a few trends could drive that number up in the future. One is that specialization is increasingly critical. I also think it’s a lot easier now for buyers to find sellers and vice versa, for sellers to find buyers with the technology that exists today such as the internet. This is particularly true when you are involved with a platform company, and so going out and finding additional add-ons within the space. There is a lot more ability to do that today than there used to be 15 or 25 years ago.
David Mahmood:
For privately help companies, the owners know their business thoroughly as well as their marketplace. But there is a certain lack of sophistication here with respect to selling. As much as 20 percent of our business has been with firms that have gone through a process which has failed. So owners have suffered from deal fatigue, and it takes them awhile to decide whether or not they want to bring their company back to the market. So they’re looking for help. We’ve also found several private equity groups who appreciate having a good banker on the other side of the table that can help them move the transaction forward, since for many privately held companies it’s rather an emotional event. So I think that the typical middle market banker adds significant value and really helps assure that a transaction is brought to a successful conclusion.
Allan Siegert:
So we’ve established that the vast majority of deals are in the hands of intermediaries and that’s got to raise some eyebrows at private equity firms. Ulrich, let me ask you what should these private equity firms do to make sure that they are not missing out on deals?
Ulrich Schneider:
The best potential buyer will engage in an exchange with us in order for us to know them better. And it’s not enough just to know they are there, you have to know who would be a good fit for a client. That brings them to the top of our mind when we have the right opportunity.
Martin Stein:
I have a question on that from the advantage point of a buyer. We spend a lot of time each year going to conferences, doing outbound phone calls with various investment banks and even taking visits to different geographies. And yet, in spite of those efforts, the auction process still seems to just come down to price. So I’m curious if it matters how well you know the buyer if most sellers are just going to say we want top dollar for our company.
Ulrich Schneider:
I think it depends on the situation of the seller. I think the higher you go in the transaction value, the more professional it is and the more personal it gets. Price plays a significant role, but as you move down in transaction value, other items like the deal structure, personal fit, future prospects of the company – especially if it is a company where the founder may still be in charge – and other soft factors become much more prominent and important. So for us, it’s not just good enough to know who the buyers are and what sector they’re in. You have to know their personality, especially in the lower-end of the market.
David Mahmood:
Martin, if I could respond. I think that it’s the investment bankers’ responsibility in sitting down with a seller to explain to them that while they approach the sale of their company as getting the best possible price as being the paramount goal, we spend a great field of time explaining to them that they are going to stay into the deal generally speaking as a minority shareholder. That they don’t want to make the next several years of their life miserable so they better make certain that there is what I call a shared sense of values with the acquirer. And so we believe we have the responsibility to psychologically set up the seller for what’s going to take place and what’s going to happen. Every intermediary certainly wants to sell the business and collect the commission. On the other hand, you want the transaction to be successful long term both for the buyer and the seller because there have certainly been enough private equity deals that have taken place where unhappy owners have exited the company and the relationship part didn’t work out very well. So we spend a great deal of time bringing potential sellers into our offices from around the country. We spend a day educating them, sharing with them what they are going to experience in a typical transaction with a private equity group and what to expect. It makes the transaction go a whole lot better.
Allan Siegert:
Ok! Let’s continue to talk about auctions for a minute. Bruce, let me ask you what other than price should help private equity firms during the bidding process.
Bruce Cameron:
There are couple of things. Certainly a part of it is industry knowledge. It’s frustrating to a lot of the people we deal with to keep trying to educate people about their industry, so it tends to be the people who specialize that have better luck. Having relationships is a second factor, as showing up cold makes it a lot harder to win deals. And then it’s the attention to details. So your responsiveness to the process is fundamental in terms of keeping people happy. We have been going through one situation where there are a couple of private equity players involved and one spent the time to understand the background around the people. They made an effort to visit them right away, kept in touch, and sent them articles related to their business. And then we have another situation where it’s been tough to even schedule a meeting. We set up a conference call with a senior member of the firm, and then suddenly he couldn’t make it. That doesn’t show respect for the seller’s businesses. So while the economics are important, it’s the ongoing interactions and overall relationship that is more important in a lot of these deals.
Martin Stein:
That appears to be following basic etiquette. Are those really differentiators for private equity firms? How many private equity firms don’t follow these basic rules?
Bruce Cameron:
You would be amazed. Private equity professionals are all very busy and it’s not necessarily their intention to miss meetings. With so many different transactions going on, it can be hard getting their attention. Another thing we see is that they often have someone junior reach out to develop a new relationship. Then we occasionally see the senior members show up afterward, but make the mistake of removing the junior person who started and developed the relationship.
Allan Siegert:
Ok. David, let’s take a look at the other side of things. In your experience, what kind of things beyond what Bruce has mentioned have you seen private equity firms doing that have actually hurt their chances of winning a deal?
David Mahmood:
Well, some years ago at a conference I spoke with the managing director of a fairly large private equity group who indicated to me that he reviewed 100 firms in the course of a year, issued 25 LOIs and followed through buying four or five of them. So there were 20 or so companies the firm signed a LOI that went nowhere. That to me says private equity groups can hurt themselves by moving too quickly. They might not know enough about the company, have met the owners, or wanting to blitz a deal to avoid the auction process. We are very careful. We want to make certain that the chemistry and price is right, and that the private equity group has made a big enough effort to increase the chances of closure. Too often we have seen private equity firms move quickly and then step back and say “No, this really isn’t for us.”
So we work with firms that over the years take the time to build the relationship with the client. We are careful. We don’t go to private equity groups who don’t understand the vertical or don’t have the right background or experience. It’s easy to get mesmerized by an $80 million dollar company that’s making $20 million. In fact, I have one right now that has almost a 50 percent gross margin, which is highly attractive. A lot of people would make an offer on it, but we are going to limit it to folks who know and understand the business and appreciate why the company is making that type of margin.
Martin Stein:
Hey Allan, this is Martin, the lone private equity guy on this panel. It’s hard to be a PE guy on this call, with a lot of these comments here.
Allan Siegert:
Are you worried about getting blacklisted? It sounds like they are kind of choosy about who they go with!
Martin Stein:
Well, I think that David’s comments and Bruce’s recent statements are really insightful and I think that’s the heart of what this call is about. And David, I loved your numbers in terms of challenges for the private equity guy and the number of deals that come through. I would like to put it back out there for any panelists on the investment banking side because I know when we are looking to exit a business and certainly when we’re looking to buy them, a lot of the investment bankers will say, “Hey we go out to the top 300 private equity firms. On top of that, some investment bankers say there are 3000 to 5000 prospective buyers. So today companies are coming to market to a much broader group of buyers. So our difficulty as the private equity firm is exactly that. We’ll see 5,000 transactions a year knowing that only 1,500 to 2,000 will close that year. And we’ll also know that multiples have expanded quite a bit. So I guess given that environment right now, with so many companies coming to sell, and so many investment bankers taking them to a wide universe of buyers, how should buyers manage the process?
David Mahmood:
I have an appreciation for what Martin has just stated. I have been in this business for 30 years now and we belong to an organization called Global Scope. They have 60 offices worldwide with over 500 investment bankers we share deals with. So we live in a global world. We are doing cross-border transactions on companies that are making $5 million to $6 million dollars EBITDA. Years ago that was something that never took place. And that result is that a guy like Martin ends up drinking from a fire hose. For us, we recognize the number of private equity firms out there. We try and discriminate rather than just sending out broad sights. We really try and determine what’s in it for the acquirer, so we look for the private equity groups that have a track record of either having owned the company or presently own a company in the vertical that can potentially relate to the business and to the client. Part of the problem is just too many investment bankers send out the profile to everybody in the world. My attitude is you should have an appreciation for the buy-side. What’s in it for them? We spend a great deal of time doing research on buyers. If we are going to a buyer and say we have a transaction, we should be able to explain to them the value, which is more than just sending out a sheet on a company. We make a point of laying out for the private equity group what the business is about. And we appreciate a quick no if the deal is not for them. We find that all this extra work pays off because if you give the private equity group a real thorough explanation on the company, the vertical, and you tell them why you are calling them because they presently have a company in their portfolio or had one in the past, they can respond more intelligently than they can from just the sheet of paper that gives them the industry, the revenue, and the adjusted EBITDA.
Allan Siegert:
So that kind of leads into technology and some people say that the current technology is disruptive. I see it. Of course I’m biased being from Navatar, which created a product disruptive in a positive way that helps both M&A firms and private equity firms review more deals than ever before. But I was wondering from the panel, how do you see this technology changing the M&A business and private equity business?
Martin Stein:
Well, Alan. Good question. A number of these themes have already come up in the course of our conversation. In the old days, we did look at up to 500 deals a year. Today, we’re looking at anywhere from 4,000 to 6,000 deals a year. It is impossible to do a deep dive in that many transactions. It would not be economical. So we have to do a very quick screen. And as Bruce referenced, it is tough to do that, and be as responsive as we would like. If there was an unwritten rule that investment bankers could only send deals to the best 300 buyers – or the best 50 buyers would be even better – then there would be more of an opportunity to do those detailed reviews. So, the number one impact of technology is increasing the speed and processing that we have to do for individual transactions. But the disappointing part is that it also creates a much more challenging environment to build relationships. The buyer and seller still need to have a fit. So I’m a little bit pessimistic on the impact of technology. That being said, there is no way that we could get by without tools like Navatar. It has been instrumental in us reviewing these transactions. It is just that there are costs associated with it.
Bruce Cameron:
I have a very different perspective on all this. We use the technology in effect to do a huge amount of pre-screening. And it sounds like others may be going out to lists of players, and maybe that’s the orientation in other sectors. In our case, clients look to us to do the screening upfront, meaning we go to as few buyers as possible while still creating a competitive arrangement. That means we are going to ten, maybe 15 people for each transaction. And the way we make sure we’re going to the right ones is by talking to a lot of people. All of our 15 partners then collaborate and put that information into our CRM system so we are all up to speed on what’s going on and what sort of information we’ve gathered from those various conversations. So that allows us to think about what are the right other people to go to. Our clients are highly sensitive to confidentiality. Letting that information get into the marketplace is death, certainly damaging to business. So try to keep [the number of prospective buyers] as small as possible. We use technology to prescreen people and just focus on the ones that we think are best.
Martin Stein:
Do you still think you are able to get the multiples at a premium level for sellers under that strategy?
Bruce Cameron:
Yes, if you look at the transactions in our sector, they are those premier types of multiples. But as I indicated before, part of it is the valuation over the longer term. Often [our clients] are selling a partial interest in their business. They want to get an attractive multiple upfront, but they also want someone who can really help them build the business and provide continuity. People staying with the business is one of our measures of success.
Ulrich Schneider:
I’m in a similar situation as Bruce. We usually deal with privately held companies who are very sensitive on a lot of issue like confidentiality and finding a good fit. So we do a lot of screening beforehand to find the right partners. To do that, we must have the relevant information on potential buyers at our fingertips. To have all the data points, including information on portfolios and deals. Technology is very useful for that as it provides you a lot of information that you didn’t have before.
Tim Page:
We do the same thing. For us, we look at each process as being bespoke. We figure out what the best distribution plan is for each security, which really depends on the situation. So if you have a very plain vanilla product, let’s say an investment grade bond worth between $150 million to $200 million, well that’s going to be appealing to a wide, broad variety of clients. To get the best execution in that type of market does require a broad distribution. You will go to your favorite 100 to 200 friends to get that process completed in the best, most efficient manner to drive the best pricing. On the other hand, a lot of transactions are very bespoke and unique. Even a very large transaction may only go to a small number of folks. Earlier this year, we did a $520 million equity placement for a unique power plant asset. We used Navatar to review the past four or five deals we did of similar type, and then culled that list down from 200 favorite friends to 20 likely buyers. And we only went to market to those 20 potential buyers because we knew they ultimately would be the ones most serious about this. We didn’t want to waste our time, the clients’ time or investors’ time. From there, we selected five of that 20 to bring through to the second round and we ended up having a successful deal. So it all very much depends on the type of asset, the product and mode of distribution. As an investment banker, it is incumbent on us at the outset of the transaction to identify who the appropriate buyers are.
Martin Stein:
At the risk of being controversial here, to hear the panelists say that they can find the right 15 to 30 buyers for a deal seems a significant assertion. In niche industries that may be the case. Or when you get to very large companies, say above $500 million. But we talk to hundreds of investment bankers a year, just as you talk to hundreds of buyers a year. And I know that one theme that comes up frequently is that a lot of time sellers will not know who the ultimate buyer will be. I know one particular investment bank that touts the large scope and reach that they have. And from their data, they assert that 75 percent of sellers did not know who the buyer was going to be. So I would love to hear some commentary on that. How is it you are able to find the right 15 to 30 buyers, and that you can still maintain the maximum selling price when you now have a global marketplace?
Bruce Cameron:
One thing that we do is start out with a broad list with the client and talk about some of the potential targets that are out there. But then what we try to do is use the information we have about the marketplace to discuss other aspects of the buyer like cultural fit. That helps us narrow the original list down. So it’s not that we go to the client with the right 15 buyers, we mention the other 30 or 40 that could fit, but discuss with them privately in their offices about these different aspects of the buyers, including the approach that they take to transaction structures, the approach that they take to integration, the approach that they take to working with people and also the valuation parameters they have. Because sellers ultimately have to spend time with each of these buyers in meetings, and there’s only so much time in the day, it is important to create that targeted list.
Martin Stein:
I’m curious Bruce, what percentages of your transactions are international? And what percentage of acquisitions come from an external or neighboring industry?
Bruce Cameron:
The amount of international deals we have is probably somewhere between 40 and 45 percent. So quite a bit. The amount of people from neighboring industries has declined over the years. It used to be that we would see industrial companies trying to buy asset management firms or securities firms. You would also see investment banks and insurance firms buy across the lines. But now you don’t see a lot of people from other sectors [cross-selling] because of regulatory issues.
Allan Siegert:
So we’re going to start taking some audience questions. First one coming in from Jessica, who I believe is at a private equity firm. She wants to know the best way to get in front of an M&A firm so that they don’t miss deals. And I guess that she is referring to making calls, or sending emails. Let me throw it out to the group, what is the best way to approach you if there is a private equity firm that is not on your radar?
David Mahmood:
For us, we really appreciate private equity groups that can be more specific as to what their interest is. Too often, private equity firms all sound alike in what they are looking for. Those private equity firms that take the time to really share with us their sweet spot, so to speak, those areas they have a particular experience and interest in, and can talk about it intelligently, we put that in our database. That becomes a big help for when we have a company that we believe is a good fit for what they are looking for. For a lot of firms, we are spending time looking at what they own, or have owned, to try and determine whether or not they would be a good fit and why.
Bruce Cameron:
Making the effort to get in touch with us. We have people that send us emails as introductions and then a follow-up call or meeting to try and understand exactly what their interest is and in what sector. It is helpful for us to get a sense of who they are. And having a sense of the cultural fit is important so we need to actually talk to them too.
Tim Page:
I agree with that. We do probably a couple calls a week with investors that may have seen one of our transactions that hit the wire, who may want to learn a little bit more about that. But we also want them to describe for us their preferences and investment criteria so that we can be on the lookout for them. With any of this, communication is key. And it goes both ways. We want to learn about you and we want you to know about us so that you can be on the lookout for our deals.
Ulrich Schneider:
I think it’s always very helpful to understand their experience. To private equity firms, I would suggest that they talk about the deals they did, what was special about them, how they succeeded. Because it adds some flesh to the bone, rather than just the verticals and the few sides they’re interested in.
Allan Siegert:
This question is for Martin. Frasier asks if LPs are binging up deal sourcing capabilities during fundraising conversations.
Martin Stein:
Yes, a lot. LPs are interested in our understanding of the market, what’s transpiring, and how we go about finding our deals. A lot of LPs are interested in and intrigued by proprietary sourcing. So it’s interesting to see the data from Sutton Place that shows how little proprietary deal sourcing is actually going on. I think a lot of private equity firms try to distinguish themselves with that. But LPs are highly interested. We’ve got to find companies, buy them, govern and manage them and then sell them. So LPs are interested in each facet of that and what it is we do that’s different or better than the other GPs out there.
Allan Siegert:
We have a comment from Steve. Where do the buy-side research firms fit into this whole process?
David Mahmood:
From a bankers’ perspective, it’s a little bit like Sunday afternoon football. On some days you’re on offensive and on other days’, you’re on defense. I think that good investment banking firms have to have an appreciation for both the buyers’ needs and sellers’ needs. As an investment banker, the older I get, the simpler it becomes. For acquirers, it’s always too much money. For sellers, it’s never enough. So personal relationships end up becoming exceedingly important. And we’ve had several sellers lately take deals that were less than the highest offer simply because of the personal relationship factor. They felt more comfortable with those folks.
Martin Stein:
David, this is Martin. With all of your comments on relationships and the emotional aspect of auctions, it sounds like sellers should hire therapists as opposed to investment bankers?
David Mahmood:
Well, we tell all of our investment bankers it’s about more than just your negotiation style. A lot of bankers we hire are bright and competent. They have a great financial background. But we tell them a degree in psychology wouldn’t hurt. Every year, we go through a lot of training – some people might call it touchy-feel – on how to build trust. It involves non-verbal communication skills and a variety of social styles training. And we found our productivity went up because of it. Remember that this is still a personal relationship business. If it was only about numbers, all you would have to do it post your numbers and the deal would take care of themselves. But anyone who has dealt with emotional sellers has an appreciation for what it takes to get a deal done.
Martin Stein:
Wow, Emily Post, Sigmund Freud and Dale Carnegie.
Allan Siegert:
We have another question. As a private equity firm, we get mad when we are ignored for a deal we would’ve been appropriate for. How do we approach the M&A firm to make sure it doesn’t happen again without sounding whiny?
Bruce Cameron:
We’ve heard from people with this frustration. It’s usually constructive for them to reach out and ask about the transaction and why they weren’t included. They should see if there’s something we didn’t know about them or vice versa. Sometimes it’s that the client was very particular about the sort of firms that were involved. Sometimes they didn’t want private equity. And the fact that they’ve reached out reminds us they remain very focused on the sector.
Allan Siegert:
A follow-up question. Who’s easier for sellers to deal with, strategic buyer or private equity firms?
David Mahmood:
If you look at the first quarter of this year worldwide, 80 percent of all transactions were strategic. Strategic acquirers, like private equity firms, are sitting on a lot of money. The reality is they typically don’t need banks and they don’t need financing. So they do have a built-in opportunity when the market is good to move fast. But that comes at a price. It works well when people are willing to sell 100 percent of their business, or pass the baton. But with a lot of baby boomers who’d like to take some chips off the table, I think private equity groups have a leg up over the strategics who want a 100 percent take-over.
Allan Siegert:
Well thanks David. It looks we’re out of time. We should wrap up. I want to thank everyone for joining today and for the great questions. Special thanks to our panelists David Mahmood of Allegiance, Bruce Cameron of Berkshire, Tim Page of Whitehall, and Ulrich Schneider of Proventis Partners. And a special thanks to our co-moderator, Martin Stein, of Blackford Capital.