PE Business Development Post-Coronavirus — COVID-19 Virtual Roundtable

On April 8th, as part of our ongoing COVID-19 virtual roundtable series, Axial hosted its fourth virtual event focused on the coronavirus and its impact on the lower middle market. The discussion was centered around lower middle market business development activity (or lack thereof) in today’s uncertain environment. How is the BD ecosystem evolving in this time of upheaval? Are firms pressing pause on sourcing? Will investors change their mandates in response to the pandemic?

We’d like to thank the eleven BD professionals who came together on Zoom to discuss how their day-to-day functions have evolved since the onset of COVID-19:

• Jason Burmer, Vice President, Edgewater Capital Partners
• Nick Canderan, Director of Business Development, CIVC Partners 
• Kate Faust, Partner, Rockwood Equity Partners 
• Farrah Holder, Director, IMB Development Corp.
• Craig Korte, Director of Business Development, Industrial Opportunity Partners 
• Kelsey Lozier, Business Development Manager, Silver Oaks Services Partners 
• Lori Lombardo, Principal, Entrepreneur Partners 
• Joan McGeough, Chief Marketing Officer, The DAK Group 
• Stuart (Stu) Noel, Director of Deal Origination, Compass Group Equity Partners 
• Monte Salsman, President, Winsupply 
• Court Scaccetti, Director of Business Development, Graham Partners 

Video

Watch the recording on Vimeo:

COVID-19 Virtual Roundtable: The State of Business Development from Axial on Vimeo.

Audio

Stream audio only via SoundCloud: 

Show Notes 

Introductions – 00:00-17:00

How is time being spent (differently) right now? 17:00

• In the industrials world, there are fewer CIMs to read (~90-95% reduction), so there has been a lull in sourcing as people get their bearings.
• Industrial Opportunity Partners (IOP) invested in distressed companies in Fund I, so they’re dusting off that experience for the coming quarters and refreshing relationships with turnaround advisors.
• In the first few weeks of the pandemic there was still some residual deal flow, but some have seen that slow down significantly as of this week.
• Focus has shifted to add-ons for portcos that are doing well; it’s a good opportunity to get a deal on companies that may not be able to/want to weather this storm.
• CIVC has shifted away from new business development and they’re doubling down on their existing connections, taking this opportunity to strengthen those relationships on a more personal level. They’re also taking advantage of the additional BD bandwidth to work on some new, creative projects that they can employ as things begin to normalize.
• The DAK Group is reaching out to their audience with timely updates and information on how to get through this period of uncertainty.
• It is widely agreed-upon that bankers have begun to do more outreach; people who used to be too busy to talk are now reaching out to connect with buyers.
• IMB revisited a (cancelled) conference list and found that they were able to have even better first conversations with people because everyone has more time to chat.
• This could be a time for direct outreach, but it’s recommended to email rather than call to be cognizant of time constraints.
• Speed dating conferences have been a good way to connect with people, though people are still getting used to the technology that is being used.
• It’s important to take the time to talk to colleagues and peers to learn what they’re doing, because everyone is in the same situation right now and is trying to learn how to be more effective. 
• Graham Partners is getting creative and BD is spending more time with their operators, talking to them about their needs and doing prep work so that when things pick back up, there will be an entire set of new ideas that they can use to aggressively pursue.
  

How have strategic acquisitions been affected? 36:40

• Winsupply is a corporate acquirer in the distribution sector with 8 business categories that are all considered essential, and they all performed very well in March.
• Last week Winsupply had 9 companies that they were prepared to price, and they pulled back on all but one of them (which closed last week, because it was at a good multiple and it was further along in its process). 
• All other eight are still enthusiastic about closing, and Winsupply is now reaching out on a weekly cadence.
• Receivables are going to be the thing that shift people’s opinions on price.
• Thinks that their distribution sector is at least 30 days away from people hitting the panic button.

How is travel impacting transactions? 40:45

• Without having the opportunity to get on a plane and go somewhere, a lot of deals will likely get to the eighth inning (digitally) and then get delayed. 
• If travel remains limited, will CEOs have to come to terms with needing to take a much lower price because they want to offload their business?
• Businesses (and investors) feel like they should keep momentum going, but go at a slower pace in the hopes that by the time they get to a certain place, things will have returned to a bit more normalcy.
• It’s better for processes to go from a run to a walk rather than to halt because then you’re maintaining relevancy and staying top of mind. When things pick back up, you’ll still be in the game and not on the sidelines.

Adjusting pricing/financials – 49:10

• Buyers are submitting LOIs looking at the next twelve months versus LTM financials
• This could be considered forecasting in the dark; you need to design a model that works with this, and it’s likely not sticking with the existing multiple.
• For the above, you’d need to structure the deal so that you only get the full release of funds if/when you hit the numbers that are forecasted.
• Firms are going to need to employ more creative structures in order to keep the lower middle market going over the next 6-12 months.
• A lot of business owners have a number in mind when they’re thinking about an exit scenario — it will be an interesting challenge for bankers working with business owners who feel this way and will likely need to accept a new reality.

What will BD look like post-COVID? 55:27

• Will these new tools that people are using stick, or will BD professionals revert back to the old way of doing things?
• Prior to this, lower-middle-market firms were resistant to Zoom, and now they have to use it. This was a nudge that the industry needed. So after this, everyone even if it does not become status quo, it will be accepted and adopted more widely (when needed).
• One possibility is that you could create a hybrid model, where you meet new people in person and maintain existing relationships via Zoom, without the travel.
• Conferences tend to be in big cities, so virtual meetings could be helpful to reach individuals and firms who are in different regions that you may not go to otherwise.
• Getting on an airplane and seeing someone in person will make it mean something much more than it did before, because people will recognize that it theoretically could have been done via video. It will send a signal that you’re serious.
• Marketing and travel budgets won’t be as tight of a restriction.
• Video conferencing will be able to enhance relationships; even if it doesn’t make a huge dent on in-person interactions, it may replace (or significantly eat into) phone calls.

The progression of later-stage transactions – 1:10:50

• On Axial, all transactions that were set to close in March were pushed to an uncertain future close date.
• CIVC closed two add-on acquisitions in the past two weeks, both of which required financing and additional equity. Most of the heavy lifting was done, and they really just needed to tie up loose ends.
• Subscription businesses are going to be more likely to stay on track financially, so those may be more likely to close. A major part of it comes down to: where do businesses fall with their level of disruption?
• Compass Group is under LOI (and in the later stages) with two companies and it’s tough to tell if you’re over-communicating/bothering someone, but they feel it’s important to do that, especially now. 
• IOP has an add-on deal that went under LOI after things had started getting dicey; they visited before travel had shut down, so they had checked that box. QofE has been done 100% remotely and has been going very smoothly (this is an opportunity to go fully digital in the future). The question remains: when can it realistically close?
• IMB has two transactions under LOI and they had financing meetings scheduled when everything got fully shut down. They went forward with the process anyway — mezz/unitranche seem more distracted, but senior lenders are being very responsive. They’re also in the process of signing another LOI right now on an essential business, and they’re expecting to go forward with it.

Previous COVID-19 Virtual Roundtables

Roundtable 1: How Coronavirus Is Impacting Lower Middle Market M&A Activity 

• Video
• Audio

Roundtable 2: Portfolio Company Crisis Management

• Video
• Audio

Roundtable 3: Distressed Investing

• Video
• Audio

If you’re interested in participating in Axial’s virtual events, including our upcoming Concord conference, please email [email protected] for more information.