PE group co-chair Jake Bullen says deals between $50M and $400M still getting done despite headwinds
Mergers and acquisitions in the mid-market – deals between $50 million and $400 million - remain robust compared to “mega deals,” says Jake Bullen, co-chair of the private equity group at Cassels Brock & Blackwell.
“My sense of 2023 right now is the mid-market and private equity sectors will remain robust,” Bullen says, adding that the valuation gap between buyer and seller narrows as both sides process market information.
And while there will likely be a decrease overall in dealmaking, thanks to economic considerations such as higher interest rates, and geopolitical risk, like the war in Ukraine, these factors will likely have less impact on the mid-market.
“Unlike the megadeals, there’s less sensitivity to the interest rate component,” says Bullen. “The private equity fund or the strategic buyer may be able to find more of it from cash on hand, or shorter-term lending facilities,” that make them less sensitive to interest rate increases,” says Bullen.
The second reason Bullen cites for maintaining an optimistic view is that “there is a lot of money out there to be put to work” in the mid-market. While it may take a little longer to get the target return on investment, Bullen says, “if there is a good deal to be done, and if the numbers make sense, you’ll do the deal.”
However, Bullen says the desire to do deals doesn’t mean private equity isn’t looking to minimize risk. “I’ve seen many of our private equity clients take a step back and say, ‘we can add value at different stages of the lifecycle of a business.”
Taking a position earlier in the growth cycle with minority stakes
As well, increasingly, PE is using a “growth capital” strategy where it doesn’t buy a 100-percent interest in an acquisition target, or even a majority stake, but instead acquires a minority position in a company at an earlier stage of the growth cycle.” They can also bring their expertise, best practices, and professional management to create the best circumstances for growth.
“The idea is that you get in there earlier. Why? Because many good companies aren’t ready to be 100 percent sold yet,” Bullen says. These companies need capital and hope PE will get them to the valuation they think they deserve. And the PE investors who provided the resources to grow through a minority inventor are likely “the natural choice” to buy out the company and perhaps run the business even longer before selling it themselves.
And, of course, says Bullen, there will still be chances to buy companies outright, especially as the Boomer generation considers retirement and entering a new phase of their lives and reaping the rewards of having built a successful business.
Increasing use of representation and warranty insurance
Another trend that Bullen sees is the increasing use of “M&A” or “rep and warranty” insurance by private equity as protection from a deal’s potential downside. Representation and warranty insurance is a tool in that toolbox to manage a big chunk of risk, he says, adding that his job as a lawyer is to do a “deeper dive” on what the insurance covers and what it doesn’t.”
And with the right type of policy, Bullen says insurance can help PE move a deal more quickly to completion. “It lets you get some diligence matters taken care of and puts a box around them,” he says while maintaining the relationship with the seller. “It’s a matter of getting as much information as possible and then letting any potential liability sit with the rep and warranty insurer.”
Another tool to manage dealmaking is the use of earnouts. If there is a gap between buyer and seller on what the business is worth, a solution might be to agree on a price, with the proviso that if the company performs above a certain level, the seller will receive additional money.
Bullen says that as a lawyer working with private equity clients, his job is to “help manage risk” and balance that risk with the desire to get a deal done.
“Making sure the client happy is number one,” Bullen says, adding that this includes managing the deal through the entire process and clearly allocating responsibility.
Then there is touching base with all the players involved and ensuring that “my team has all the support they need to do their job.”