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Private equity remains hopeful amid deal slowdown, M&A practitioners say

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Merger and acquisition practitioners from the world of private equity remain hopeful for a recovery in despite a slow start so far this year, after the usual flurry of deals failed to materialize in recent months.

Alison Heyden Colby, assistant general counsel at Warburg Pincus, said some sales processes are underway with motivated corporate buyers looking at ways to boost growth from acquisitions.

But on the down side, many company owners either expect buyout prices based on better economic conditions, or they remain on the sidelines altogether.

That leaves private equity firms on the hunt for acquisitions turning to proprietary deal flow from their own contact lists.

“We’re trying to lean on relationships to drive deal flow,” Heyden Colby said. “Be careful not to be paralyzed by uncertainty. You could be sitting out a great year.”

Private equity firms remain particularly sensitive to high interest rates since they base their investment returns on prices paid for a target and the cost of debt, she said.

Private equity buyers have turned to smaller, less risky bolt-on deals for portfolio companies instead of buying new platform companies, she said.

Another area of opportunity is partial exits of portfolio companies. Instead of selling a company outright, some private equity firms have been able to generate gains by drawing in capital from other sponsors for minority stakes in portfolio companies.

Paul Imperatore, partner at corporate law firm Cleary Gottlieb, said he’s also seen a value gap between buyers and sellers, but is seeing signs that things may pick up as debt markets stabilize this year.

While many sectors remain quiet, activity is better around health care deals, as well as corporate carve-outs, he said.

Cynthia Romano, global director, performance improvement and restructuring at law firm Cohn Reznick, said private equity funds focused on distressed debt raised billions of dollar in expectation of a sharp economic slowdown in 2020 during the COVID-19 lockdown, but little of that money ended up being deployed.

Romano is seeing some activity picking up though as dealmakers look toward the balance of 2023.

“At the end of the day, there’s still a ton of dry powder and the lenders have to put money to work,” she said. “As for sellers, the best way to get a high valuations is to have a great company. You can find partners to help you execute or sell it, or with growth equity you can get minority investors.”

Brian C. Lavin, partner at Paul Weiss, said he expects the M&A market to be soft in the first part of the year and “hopefully” pick up in the second half. He agreed that sellers need to adjust their price expectations.

“As 2022 closed out and as we head into 2023 people are getting more comfortable with the bottom not being as scary and unknown as it was at the beginning of 2022,” Lavin said. “Uncertainty is what dries up deals. People are getting more conviction about what the bottom will look like and that will drive activity.”

Elaine Carey, managing director at FTI Consulting, said lofty private company valuations into the tens of billions are starting to get more scrutiny after the FTX bankruptcy and overall lower deal activity in the world of venture capital.

“People are a little more willing to have investigators dig deeper,” Carey said. “People are a little more willing to ask harder questions. It’s never harmful to know all the warts up close. It makes a deal better in the long run if you know everything people have done, even if it derails or delays the deal.”

In the world of corporate M&A, the first quarter typically gives dealmakers a chance to finish up the transactions that didn’t reach the finish line during the rush of deals that typically ends each calendar year.

With 2022 limping to the finish line for M&A, however, things look quiet right now as sellers shy away from the table in the wake of lower public equity prices and higher debt payments used to finance acquisitions.

The comments above were aired Thursday in a live video program called M&A and Private Equity Outlook 2023, moderated by Alex Kasdan, founder and president of Convergence Capital Partners, and sponsored by ShareVault.

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