When the odds are against you

As mid-market investment professionals gathered for the Association for Corporate Growth's annual InterGrowth conference in Las Vegas, the casinos and gaming tables may have reminded them of the state of the market. The deals might be there, but many carry terms too loose and prices too high for managers to take the risk of playing.


Delegates cited inane terms dealing with minutiae like EBITDA add-backs along with sky-high valuation multiples as reasons to be pickier about the transactions they execute.


The conference presaged a slew of business development company earning calls making clear that it is currently a borrower's market. Kipp deVeer, chief executive of Ares Capital, said his firm's approach to selecting deals is “remaining selective and defensive in nature”. Michael Fishman, co-CEO of TPG Specialty Lending, said the quarter was “highly competitive …  primarily due to strong capital inflows into the middle-market credit space”.


It was clear, though, that challenges go beyond lax covenants and purchase-price multiples into the public policy realm, including taxes and cybersecurity.


When it came to the former, multiple panelists voiced concern over proposals to get rid of a statute that lets businesses deduct interest payments from their taxes. A proposed trade-off would be 100 percent deductibility of expenses, which some industry heavyweights, including The Riverside Company chief operating officer Pam Hendrickson, panned. She said getting rid of the interest-deductibility provision could hurt values in mid-market financing.


US House Republicans included those changes in their tax overhaul outline, but it was not clear if it would be in President Donald Trump's proposed plan.


Cybersecurity took centre stage when Mary Ellen Callahan, formerly the US Department of Homeland Security's chief privacy officer, spoke on European General Data Protection Regulation, a robust set of protections that could be a boon to EU citizens and pose a challenge for some businesses.


Being able to deal with these new statutes is an important consideration when doing deals with companies that have operations in the EU. Callahan said fund managers should ask potential portfolio companies if they have a plan in place to address GDPR. They cover everything from the transfer of data to notifying consumers following a data breach. Businesses could face a penalty of up to 4 percent of their worldwide revenue or €20 million, whichever is greater, if they are found to have violated the statutes.


The discussion extended beyond regulatory measures into ways firms can protect the transmission of sensitive documents and information through the deal process. The pre-due diligence phase is where information is often the most vulnerable, Callahan said, which could mean confidential material should not be emailed.


Private debt still has plenty going for it: limited partners throwing money at the asset class, the secular retrenchment of banks and investor appetite for yield, to name a few. But the asset class faces challenges, whether relating to market conditions or policy decisions. Participants had no problem tackling these issues head on in Sin City.