From feast to famine in New Orleans

Last month PDI attended the sprawling ACG InterGrowth conference in New Orleans, where private equity honchos, debt managers, banks, service providers and mid-market company executives all gathered to talk deal making. Dozens of firms had booths set up to advertise their services, while many managers arranged meetings on the sidelines to pitch prospective clients, compare notes on interest rates, gossip about competitors and talk about which would be the best party that night.

In one of his first public appearances since his move to CPPIB, Antares Capital's David Brackett took the stage to share what his firm has been up to since being sold to the Canadian pension plan by General Electric in August. Brackett told the audience he had a particularly good week recently, having closed 19 deals, of which Antares led 17. That volume seemed particularly impressive at a time when many managers appear worried about market volatility, defaults and some negative economic indicators.

Antares' experience isn't common, however. Brackett, and Antares' other co-chief executive, John Martin, are famous in the mid-market lending business. The duo have built relationships with the sponsor community for decades, working together on large deals at GE Capital and other firms for many years. The firm is one of the largest and oldest lenders in the business and a go-to among US sponsors.

Antares also has something to prove. With many of its competitors watching and gossiping for months about what the GE Capital sell-off would mean for the business, the firm is eager to show them that it's still alive and well. Brackett said Antares normally does 225 to 250 deals per year, and the pace didn't fall off by much in 2015: it was at 175 and he expects to get back to the normal volume this year. Antares has been particularly active in the TMT and healthcare areas lately, Brackett said.

Asked about competitors Antares frequently sees in the market, Brackett said that on the banking side it's been Bank of Montreal, the Royal Bank of Canada and Goldman Sachs, as well as sometimes Jefferies. In the alternative lender community, the firm frequently runs into Ares Capital, Golub Capital and Madison Capital Funding. The firms that have been doing a lot of deals and succeeding are ones that have been at it for a long time, Brackett explained. “They are people that have withstood the test of time,” he said.

Other people and firms swarming around the conference were talking about the difficulty of finding deals or seeing them through to completion. In recent weeks, lenders and other industry experts have become more enthusiastic about some economic indicators, like equities, high-yield bonds and oil prices being on an upswing again. But no one is sure if that will last.

Private equity managers speaking on other panels about their own dealflow, which ultimately feeds lending transactions, said they also found the environment challenging, though pointed to some areas where managers say they can still find an edge.  

Charles Gifford, general partner at Boston-based private equity firm New Heritage Capital, said: “If you have a good opportunity, you have to hustle for it.” 

He added that you often have to get in front of a client eight times before landing a deal. Other panelists talked about the costs of doing due diligence on deals that ultimately fall through. Gifford also pointed out that 65 percent of the deals the firm was shown since 2014 have not closed at all.

Speakers on this panel, called “Strategy, Valuation and Integration: Securing M&A Success in 2016”, said some firms are looking for dealflow elsewhere. Some of the larger private equity players are now raising “heritage funds”, for instance, where they can carve out $400 million to $500 million to do smaller deals in the mid-market or lower mid-market space. Firms said to be in this camp were Francisco Partners, ABRY Partners and Providence Equity Partners, among others.

Asked how they see the M&A environment, Michael Hirschberg, vice-president with M&A advisory firm Wipfli Corporate Finance Advisors, said it was a little more optimistic than a few months ago, while Gifford said it was not as robust as a few years ago. However, Antares' Brackett admitted that we are in a slow-growth economy, where many lending deals this year might fall into the dividend recap bucket. 

The conference was also well attended by international service providers (ACG has international chapters and hosts conferences in Europe), some of whom told PDI that US private equity and debt firms are increasingly going across the pond to source deals, while they are finding the local market to be a bit scarce.

Either way, many managers tell PDI it's often hard to get deals done. The flow either isn't there or they suspect they are being shown lower quality or more risky deals. Brackett pointed out that M&A was high last year, second only to 2007, but people question how much further that can or should go. Leveraged buyouts were down in 2015, and Brackett pointed out that corporate earnings showed negative numbers.

All of these indicators are leaving lenders scratching their heads, yet they still need to make deals to fuel their businesses. One debt fund manager said he collected 50 business cards in one night, but emphasised that it's important to follow up with people, otherwise all the networking becomes a waste. One mezzanine manager boasted to PDI that his firm closed as many as 12 deals last year, but another junior debt provider who found mezz deals harder to come by lately said it's important to go to the conference every year and get in front of prospective clients. The conference was particularly well trodden by mezzanine firms, which some surmise is because it's particularly hard to get deals done in the junior debt sector these days. 

Some industry players tell PDI they avoid conferences that are this large (there were about 2,000 people at the ACG event) as it's hard to make proper connections there. Whether it's large conferences, small conferences, one-on-one meetings or something else, no one can deny the need for relationship-building and getting face time with clients. Ultimately, with more competition in alternative lending and other headwinds facing the market, it's harder for firms to get deals done. Far from everyone can get to Antares' level, or stay there.