2014 Predictions: Ted Koenig, Monroe Capital

Ted Koenig of Monroe Capital expects M&A activity to tick upwards in 2014.  

Monroe Capital had a big 2013, both in terms of fundraising and dealmaking. With higher interest rates around the corner, president and chief executive Ted Koenig expects M&A activity to accelerate before the Fed concludes the tapering of quantitative easing.

What’s the biggest thing on your radar for 2014? 

We see an increase in M&A activity … 2013 was primarily driven by recapitalisations and refinancing transactions. Later, in the second half, particularly in the last quarter of 2013, we started to see M&A transactions come back. And if I look at our pipeline going forward into 2014, we see lots of M&A.

What’s driving that is really strong multiples for middle market companies accompanied by very accepting financing markets.

There’s a fair amount of capital in the private equity world still on the sidelines and there’s a lot of financing power in the market right now and, from where I sit, I believe interest rates are going to start moving more.

If interest rates go up, that generally means that transaction flow contracts due to lower purchase price multiples so I think that people are going to try to run through 2014 and get deals done.

So, M&A activity will essentially be racing the taper? 

Yeah, that’s what I think will happen.

Anything on the horizon that worries you? 

We are less focused on macro factors than many, only because we are a niche player in the middle market. What concerns me generally is basic company performance. We’re very focused on portfolio management and portfolio company performance.

We’ve got 175-odd companies in our portfolio, and we’ve watched those companies pre-crisis, during crisis and post-crisis, so we’ve got a pretty good handle on stress points and how these management teams react.

Can you give me an example of one of those stress points? Obviously they differ from company to company. 

If the economy gets hit a little bit, you’re going to see consumer demand fall off. That hurts discretionary items, that hurts automobile sales, that hurts appliance sales. Companies that supply those industries tend to slow down a little bit and performance tends to taper off.

If we have some meltdown in the Middle East, oil prices tend to increase. And that makes resin prices go up and plastics companies incorporate oil as raw materials, then we start to see margin compression.

So we’re always at looking at those factors to see how well companies can handle stress.

Any sectors that you’re keeping an eye on then? 

I like the auto sector, only because units have topped 16 million in sales. I like certain aspects of the healthcare sector because there’s going to be some consolidation given all that’s going on in DC right now. I like the ESOP world, because I think it’s a very tax advantageous way to do transactions today.

We think we’re well positioned in our space as well as in industry verticals to take advantage of market conditions.