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, Seth said non-economic terms may shift towards buyers; however, he said he also expects pricing and EBITDA multiples to remain seller-friendly given the unprecedented amount of capital competing for a finite number of potential deals. Dan agreed with Seth’s perspective and indicated that he was surprised that markets had not yet corrected more. Dan added that he expects recessionary concerns to be built into the underwriting process for new financings going forward to ensure new credits can withstand a potential recession.
- Seth said sponsors must bring subject-matter expertise to drive value creation in today’s competitive market. He 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, Dan said he doesn’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 Dan’s view, value maximization is a byproduct of transparency between sponsors and lenders with respect to the health of a particular business. Dan 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. Ilya and Seth both agreed 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. Alex 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. Alex added that junior capital can provide buyers with a turn or more additional leverage when competing to purchase assets at high valuations.
- Ilya said that he anticipates large companies will divest underperforming segments of current operations if the current market downturn continues, and he identified carve-out transactions as a place for buyers to drive value creation. In his view, sponsors that can identify the root causes of underperforming businesses will have an opportunity for high returns on carve-outs.