Private Equity PErspectives Podcast - Episode 26

March 2021

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Episode 26: Successful Relationship Building in Deal Making


Introduction

Todd: Hello, and welcome to BDO’s Private Equity PErspectives podcast. I’m Todd Kinney, National Relationship Director in BDO’s Private Equity practice based in New York City. I’m delighted to have two very special guests with me here today, to discuss their takes on remote deal making and investment trends they’re seeing in the market. Just a friendly reminder that the remarks and opinions of our guests do not necessarily represent BDO’s views, and with that, first I’d like to introduce Ken Grider. Ken’s a managing director and head of business development at Raymond James. Ken, welcome to the show.

Ken: Longtime listener, first-time caller. Thanks for inviting me.

Todd: We appreciate you being a long-time listener. Next, I’d like to welcome Luis Zaldivar, who’s a managing partner at Avance Investment Management. Great to have you here, Luis.

Luis: Thank you, Todd. Great to be here with you and Ken today.
 

Introductory Questions

Todd: All right, awesome. Let’s jump right in as I’m sure we’re all eager to get started. Ken, again, as MD and head of business development at Raymond James, perhaps you can tell our listeners a bit about your firm, and what your day-to-day looks like.

Ken: Sure – I’m head of business development for the investment bank. But starting at the top, RJF, or Raymond James Financial, a $13 billion-plus market cap New York Stock Exchange company, one of the largest providers of wealth management services provided through our advisor network, which is over 9,000, so one of the biggest. We’re also known for our stadium, Raymond James Stadium, which we keep in Tampa, which is home to the Buccaneers, Brady, and Super Bowl LV.

Now, beyond all that, Raymond James also houses one of the largest middle-market investment banks in the country, approaching 450 bankers. As head of business development, we cover it in what might be perceived as a little unique strategy or way, in that, we cover three unique channels: One, we have our wealth advisors that work constantly receiving inbound opportunities to respond to, related to the company owners that they maintain relationships with. We have a coverage of professional firms, so believe it or not, accounting and law firms that we manage relationships with. Then we have what we call an institutional capital provider coverage network, which is venture mezzanine and private equity providers. That’s, if you will, the net or what we seek to develop the business development front with. Any given day, we’re talking to companies that have questions and are curious how we could potentially be helpful, and lots of questions these days.

But separate from the core mandate of trying to find mandates, it’s also working with all those channel constituents to share opportunities and build relationships related to situations that may not require the investment bank, but those different channel constituents can help each other. Every day is different, and we never know what’s going to come over the bow.

Todd: That’s the fun of it, right? Helpful context for the discussion for sure. Luis, let’s hear a little bit about you. I know you just opened Avance Investment Management in 2020. As a managing partner there, maybe you could describe your company and your role, and then talk about your experience founding a new PE firm during a predominantly remote working period.

Luis: Thank you, Todd. Yes, my partners and I founded Avance in 2020. Just to put an exclamation point on an historic and chaotic year, we decided to be entrepreneurs. That said, we’re a new firm, but not a new team. I co-founded Avance with two partners I had worked with over the last 15 years. They happened to be two of my groomsmen at my wedding as well. Besides strong personal ties, we had a long, successful history of working together and building a deep network of relationships amongst investor groups, intermediaries and business owners. That’s been the key of enabling us to enter 2021 on solid footing. We’re fortunate to have Gretchen Perkins join us last year, which has only accelerated the development of Avance, and how we’re building our team.

Avance is a lower middle-market private equity firm with offices in New York and Miami. We focus primarily on recapitalizing founder and family-owned businesses in the services and consumer sectors, targeting companies with EBITDA between $5 million and $25 million.

Now, launching a new firm in any period is often viewed as a challenge. Add to that the restrictions imposed on all of us during the pandemic and all the activities that you need to do: Investor meetings, recruiting team members, sourcing new deals, setting up infrastructure, building brand awareness. It’s only now we have to adapt to that environment. A couple of reflections on that, in particular. From our perspective, the pandemic has put a huge premium on existing relationships, like the relationships we have with Raymond James, with BDO, and others. Our ability to establish a new platform in 2020 is directly attributable to the support that we have from people that knew us in the past.

The industry generally has adapted remarkably well to technology and remote workflows where we can remain with the same disciplines and processes virtually while not compromising the quality and integrity of the end product. But for us, the short game still requires an in-person meeting: signing the purchase agreement or recruiting the manager or the team member. At the end, we’re in the people business and it’s hard to replace the human connection. That’s going to be the biggest challenge we see continuing to move forward and building out, not only the platform, but continuing to do deals into 2021.

Todd: All right, certainly congrats to you and your partners and your new addition, Gretchen. We’re big fans of yours, so hoping for the best.

Luis: Thank you.
 

Relationship Building and Deal Making

Todd: Alright. This next question is for both of you, and it’s a two-parter. Speaking of remote working, how are you networking and expanding your investment contacts during this period? And secondly, how have you pivoted to conduct deals remotely? Ken, I’ll go to you first and then we’ll turn to Luis.

Ken: Thanks, Todd. Two very different buckets: existing versus new relationships. Existing relationships, as Luis was talking about, turned out to be hypercritical during this period because they’re the ones you partnered with and collaborated with on how you’re going to respond to all of these client needs and questions to educate, to train, and then to go to work for them, to get them through everything that was rolling out. Relationships that we partnered with to hold seminars and educate and respond to PPP and all these different situations as to how lawyers and accountants and investment bankers can step up to all these questions in this very uncertain time to help companies navigate through what we were seeing.

The new relationships became a little trickier because a lot of the situations where you would happenstance across someone in a social or networking event, those didn’t happen as often, certainly not in person. In the virtual environment, those types of potential meet-and-greets proved much more difficult.

What we found is that in those situations, people would find you, new relationships find you in a very purpose-driven way. They would be given your name, there was a particular need where they would seek you out or you would be given a need or a search and have to go find someone new yourself, and you’d go find them. It became very task- or need-oriented. But still, even under those scenarios, we ended up making a lot of new friends.

Todd: Makes a lot of sense, and I certainly share a lot of those same experiences. Luis, anything you care to add?

Luis: I think technology has been the great enabler for all of us during this period. LinkedIn is an extremely powerful tool, along with the CRMs we all use for maintaining and expanding our networks. I think we’ve tried to share knowledge and experiences—like we’re doing here—as much as possible, do the one-to-one but, in certain cases, one-to-many as you continue to expand out and reach as many people as possible in effectively a limited time period that you can’t travel and establish new bonds and new relationships in the same way.

Virtual meetings and even virtual conferences, we’ve found to be incredibly effective. Management meetings, due diligence sessions handled over Teams or Zoom facility tours, video-recorded—there are a number of ways that you can continue to keep up with your day-to-day work in a virtual environment. That said, I think I mentioned it earlier, the people side of this is still critically important. The social bonding that you would normally have with a new relationship or even existing one is more limited. The cultural connections amongst our own teams are the most difficult to sustain in remote settings. We try to establish some form of virtual social gatherings like holiday parties or even happy hours with some investment bankers or other industry participants. You try to mimic as much as possible what you would do in a non-virtual world. But as we get through this and we start hopefully emerging into a new normal, I think some of these tactics and tools will remain with us as we see how effective they are. But we do look forward to getting back to in-person.

Todd: Some great insight there. I am sure all of our listeners will agree that I’m not sure where we’d be without technology. I know I’ve personally hosted about 20 virtual networking events with a lot of PE and IB friends, and it’s been productive, but it’s certainly not the same. We’re trying the best we can.

Ken: I would add that on a positive note, we have closed transactions entirely virtual. I mean, if you were to go back to the beginning of the year, some folks might have thought difficult, maybe bordering on impossible. But as Luis has said, the world has become more accustomed to technology and what is virtual. What started out with just a few is becoming the new norm. Many transactions we’re working on right now, believe it or not, are closing in a virtual sense—and a couple having never been on-site with the potential buyer. Unbelievable, but true relative to the times.

Todd: Appreciate that, Ken. Luis, let’s stick with you on a similar theme for a moment. How do you plan to approach new deals in 2021 and how is that different from where you were a year ago?

Luis: I guess everything is different from where we were a year ago. But we’re now more used to it, 9 or 10 months in, I suppose. We were optimistic about new deal activity in 2021. The year is starting off strong across the board. That said, things are clearly different as we approach new opportunities. Now, we have a “COVID impact” section in all of our underwriting materials. We didn’t even know what COVID was 12 months ago, and now it’s clearly in our underwriting. Prior to 2020, we were all asking ourselves, “How did Company X perform in the Great Recession?” Now, it’s that, plus, “How did Company X perform during COVID?” I think we need to then start feeling our way through this and seeing the impact in the numbers, but also in the organization and how the organization operates and how the management team operates, etc. Lots of COVID-related underwriting.

In reality, we’re also still in the midst of the pandemic with significant limitations on travel and physical due diligence. To Ken’s point earlier, yes, people are closing transactions without having the same in-person contacts that we would normally have before. I think we’re adjusting, and as a result, spending a lot more time on industries we know well and businesses that have demonstrated resiliency through the pandemic. It just puts such a premium on your underwriting, on your discount rates, and how much you’re willing to sacrifice in your underwriting without having been able to touch and feel that the company itself.

We are seeing more exclusivity as well. Some buyers and sellers are recognizing they spend a little bit more time together. It’s a unique situation. Some of the intermediaries are running more limited, more curated processes, recognizing that the first meeting might be in Zoom versus a naturally go fly out, have dinner, and then spend more time with the management team. We’re adapting our processes while maintaining the continual flow of the capital markets.
 

Coffee Break with BDO Capital

Todd: That’s great insight and certainly some timely info there, thanks for that. Now I’d like to turn it over to our coffee break guest, Patrick Bisceglia, managing director at BDO Capital. Let’s hear what he has to say.

Patrick: Thanks, Todd, and hello, everyone. This is Patrick Bisceglia, managing director with BDO Capital Advisors, which is BDO’s investment banking arm here in the States. We’re part of BDO’s Global Corporate Finance practice, which was involved in over 1,500 transactions last year worth over $80 billion in aggregate deal value. So, if you do the math there, our average deal size was around $50M, which reflects our focus working primarily with entrepreneurs and founder-owned companies in the middle market.

Given over half of our transactions had private equity involvement last year, I thought I’d take this opportunity to share a few highlights and observations on the current deal-making environment.

As we approach the one-year mark on COVID-related shutdowns here in the U.S., there really is a growing sense of optimism among deal professionals with consensus expectations of a very active 2021. While COVID took a toll on Q2 activity last year, with many deals put on hold as boards and management teams dealt with the emerging health crisis, M&A came roaring back in Q3 and Q4, and that momentum has largely continued thus far in 2021 with announced deal values already surpassing Q1 of last year, and we’re only halfway through the quarter.

From an industry perspective, technology was clearly the standout vertical last year, accounting for one out of every five M&A transactions. One of my software clients experienced a 3x lift in user growth on its platform from Q1 pre-COVID to Q2, and those are the types of demand shocks we’ve seen throughout the tech ecosystem that gave bankers and business owners the confidence to go to market in the midst of a pandemic and still achieve a great outcome. We ended up taking that business to market in June, despite shaky credit markets and high uncertainty at the time, and by October had closed a transaction with Accel-KKR, one of an increasing number of specialist PE firms focused exclusively on the tech space.

We were already in a relatively low growth world by historical standards heading into the pandemic, but it is even harder now to find higher growth businesses, hence the premium valuations ascribed today’s most resilient companies.

Today’s valuations are as much a reflection of investors’ conviction in specific disruptive technologies as they are a function of the new paradigm of low policy rates and excess liquidity in the hands of market participants, private equity included.

With roughly $2 trillion of dry powder plus additional buying power through the use of leverage, there’s no shortage of capital looking to partner with middle market businesses across all sectors.

Over the past twelve months, we’ve closed transactions across all six industry verticals that we cover, and our greatest successes have occurred in areas where our clients may not be traditionally thought of as “tech” businesses but are leveraging technology to address large-scale, systemic problems in our economy, with our infrastructure, our healthcare systems, and so on.

So, we encourage owner-operators tuning in today to step back, when you can, from the day-to-day blocking and tackling of your business and engage your bankers and other advisors in a conversation around not only what is happening in your industry today but where it will be 5, 10, 15 years from now, and are there ways you can implement technology to better align yourself with private equity firms’ increasingly thematic approach to investing, which we expect will continue to favor all things “tech” and “tech-enabled” for the foreseeable future.

That’s all I have for today. Thanks for listening, and back to you, Todd.

Todd: Thanks, Patrick. Now, let’s resume our conversation with Ken Grider and Luis Zaldivar.
 

Private Capital Trends

Todd: Ken, we’re going to kick off the second half of the podcast with you. I want to dig in a little bit to the investment banking side. If you look at the opportunities that investment bankers like yourself are evaluating, what’s different now from the beginning of the pandemic? And the second part is, can you put your finger on any specific factors driving the change in the kinds of discussions that are coming through?

Ken: Good question. I think private equity is significant. I think we’ve seen a slowdown in institution to maybe institution trades in private equity, but the add-ons and bolt-ons activity has been tremendous. That’s projected to continue and we’re hoping and expecting some of those institution-to-institution trades to come back strong. But what’s been more fascinating is just the magnitude of founder-owned or closely held businesses that are coming to the table. And here’s what’s really interesting: Many of them a year ago were not sellers. They were riding a wave, their companies were doing better than they had ever done, and potentially a transaction or a deal—even selling a piece of the business—was not really on their minds.

But wait a minute, here comes the pandemic. Here come tough, new situations. And we really broke the companies up into three buckets: You had halo companies that just exploded positively through this year. We saw companies that turned three to five years’ worth of growth into three to five months. Those ones that were really geared to react and do well in virtual and these types of environments. Then you had the ones that kind of doggy paddled or treaded water, and then you had the ones that were hurt. These owners of these businesses, many of them all of a sudden had questions and they saw this pit, they saw the market fall, and then it came back. They saw valuations stay high. They see themselves on personal guarantees. They see a lot of their wealth in these businesses and they begin to question, “Well, wait a minute, what is possible? What if I sold? What if I recapitalized and brought in a partner and sold a piece?” A lot of folks coming to the table not committed to a process or a transaction, but wanting to see what’s possible. Then, based on those conversations, some of them were deciding, “Hey, this is a great time. Yeah, I want to pursue a process or a path.” And that, Todd, is leading to a lot of increasing volume.

I would also close with—there was a perceived push to get transactions closed by the end of last calendar. I think now that we’ve seen some shifts politically and there’s some questions relative to tax, I think folks are still under the mindset, “Well, I might not have got it done last year, but I certainly want to try, if I’m thinking about a transaction, potentially get it done by the end of this calendar.” I think that’s driving a lot of activity as well.

Todd: Awesome. You definitely hit all the highlights I was thinking about, and certainly can sympathize with those three buckets of the types of companies through the pandemic. We work with all three types, and it’s been a challenge for many of them. Again, appreciate that insight.

Luis, let’s pivot over to you. I know with Avance’s history of partnering with founder-owned businesses, maybe you could share some perspectives on the great wealth transfer, particularly given the trend that a record number of baby boomer businessowners are retiring, especially in the last year.

Luis: Great question, Todd. In the U.S. we’ve got over 70 million baby boomers and all of them will be over 65 by 2030. So we believe we’re in an unprecedented period here—early stages, in fact, of a major transition within the American economy where a significant number of businesses will need to be sold or passed on to successors over the next 15 to 20 years.

The great wealth transfer, as it’s called, represents over $70 trillion in value and could impact over 2.5 million businesses in the U.S. currently owned by boomers. By the way, those 2.5 million businesses employ over 25 million people and touch millions more through their communities, suppliers, and customers. The generational wealth transfer is indeed a huge deal and we believe it’s going to have a long-lasting impact on the U.S. economy.
 

2021 Forecasting

Todd: Yeah, I think Ken was telling me about half of that 2.5 million are looking to engage Raymond James. Right, Ken? That’s a joke, but it’s certainly something to have on our radar. Thanks, Luis.

Guys, let’s shift gears again and talk about the year ahead. I’ll toss this question out to both of you. Ken, we’ll hear from you first and then Luis. In light of potential tax changes, which you were just hinting at, do you expect an impact on forthcoming deal volume or deal terms, and if so, how?

Ken: You know I love a good football analogy. As I mentioned earlier, I think the race was to try and get things done by the end of last calendar. I think the chains have moved. There’s a new first, second and third quarter now. I think the chains are now targeting end of this calendar as something meaningful.

If you’re dialed in to what could be a future tax impact, I think mentally and potentially in reality—and we don’t have a crystal ball—but we think that’s going to create increasing momentum. I also think just values remain in a really good place right now. There’s a lot of capital to invest along with this population demographic that Luis describes, that there’s just a lot of folks that are at that period in their lives where they got to make some decisions around their businesses.

Todd: Leave it to a Buccaneers fan to use a football analogy, right?

Ken: This year!

Todd: This year, right. Luis, you care to weigh in or add anything?

Luis: Apparently, I have to use some kind of a football metaphor, so I guess we’re in the red zone here for some of these business owners that want to punch it in. But 2021 should be a strong year for exits for a number of reasons that we’ve talked about. The natural reasons that we see every year, the aforementioned retirement of the baby boomers, the near-death experience caused by a lot of businessowners last year that saw their savings potentially impacted, the strong capital markets Ken was just alluding to, ample liquidity, low interest rates, pent up demand.

In addition, you have a potential tax increase and a lot of people believe legislation will be effected next year. I don’t have a crystal ball, I can’t predict anything, but that’s what people are suggesting. In addition to everything I’ve just talked about, if you were a businessowner and thinking about a liquidity event over the next few years, you will likely accelerate that. Or at least the conversations will be accelerated this year, and we anticipate that many will actually transact.

Todd: Appreciate that. We’ve reached the last question of the session today. I’m going to throw it out to both of you, and you both said you didn’t have your crystal balls in your back pocket, but let’s bring them out for this question: According to PitchBook year-end data, 2020 saw the first decrease in PE deals—and that’s both number of deals and total amount—since 2009. What do you think 2021 will bring? Luis, I’m going to have you go first this time and then we’ll hear from Ken.

Luis: Sure. I mean, I think the ongoing pandemic is the biggest wild card for 2021. Our primary thoughts are obviously with humanity just getting through this extraordinary period. Assuming there are effective vaccines, I think that this will be a very strong year for the capital markets and PE activity. You’re emerging out of a black swan event, and shifting into a new administration should make 2021 kind of a restart year. So if you’re a PE firm like us, we’re typically underwriting for 5- to 10-year periods. We’ll be looking for a return to “normal” during that whole period, and an inflection point for underlying growth. We’re positive about our ability to get out of this. We think that that, coupled with liquidity, could make 2021 a record year.

Todd: Wow, all right Ken, how about you? What are you thinking?

Ken: I remain in Luis’s camp as bullish on this as well. I mean, I really do. I think whatever occurs on the institution-to-institution trades, as I was talking about earlier, I think there is going to be this influx of founder-owned, closely held businesses that are going to represent incremental material volume, that will be calculated in count as those private equity investments. Again, humanity first. I think Luis is on target with that as well, as I know you are too at BDO, where we’re all hoping and wanting this safer, more productive environment to potentially return. But I think opportunity is abound. There’s certainly capital, valuation winds seem to still be in our favor, and I think it’s going to be a great year.

Todd: All right. We’ll have to see how things shake out, but I like the cautious optimism and bullish attitude. Ken and Luis, I can’t thank you guys enough. We really appreciate you taking the time to join the PErspectives podcast today. It was certainly a packed discussion, and I’m sure our listeners enjoyed it as much as I did. We certainly value our relationships with Avance Investment Management and Raymond James, and hope both of your firms have a great 2021.

To our listeners, thanks so much for tuning in. If you haven’t already, we’d love for you to subscribe, rate, and leave a review of the show on iTunes. Until next time, this is BDO’s Private Equity PErspectives.
 



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