How PE Investors Can Stay Aggressive Amid M&A Slowdown

The pace of M&A activity might not be what it was at its height in 2021, but that relative slowdown doesn’t mean that private capital investors can get comfortable—in fact, many are actively working on ways to gain an edge over the competition in today’s challenging economic climate.

A panel of investors will explore this topic on Tuesday, May 9, during ACG’s DealMAX conference in Las Vegas, where they’ll discuss flexible deal structures, sourcing strategies and more.

Although fewer businesses are coming to market today, it’s the weaker ones that tend to stay on the sidelines. High-quality companies are more likely to move forward with plans for a sale, sparking competition among eager buyers, says Mike Murray, co-founder and managing partner at Toronto-based private equity firm Peloton Capital Management.

“When good assets are coming to market, there’s lots of capital out there,” says Murray, who will speak on the “Staying Aggressive in a Downturn” panel.

Still, investors face the risk of overpaying for a business, given the weakening macroeconomic backdrop. In response, private equity firms are doing more due diligence to ensure they’re valuing businesses appropriately, says Murray’s fellow panelist Milwood Hobbs, Jr., managing director at Oaktree Capital Management, where he leads North American sourcing and origination.

Hobbs adds that private equity firms have become more sophisticated in valuing assets over the past several years of high prices, and that private credit providers are similarly able to account for risk.

“In this market, you can price the risk on our side better, and then I think on the private equity side, they can actually value the businesses a little bit better,” Hobbs says. “That makes for what I think is probably going to be a better M&A backdrop than others may be anticipating.”

Focus on Flexibility

Private equity firms are looking for providers who can address their needs up and down the capital structure.

Milwood Hobbs, Jr.

Oaktree Capital Management

Business owners know they’re unlikely to garner a price as high as even 12 months ago; rather than chasing the highest bid, some owners are prioritizing finding an investor that’s best equipped to support their business.

Murray points to a growing interest in flexibility among business owners, especially those not ready to sell outright and walk away. There’s rising appeal of investment structures that allow founders to maintain a meaningful interest in the business and to stay involved in its operations.

There’s also sensitivity about the possibility that an investor will be forced to exit during a less-than-ideal market like today’s, to return capital to limited partners at the end of the investment period. It’s a question Murray says he hears from sellers who are curious about Peloton’s long-term investing strategy, which targets a hold period of about six to 10 years.

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The ability to be flexible also applies to private credit providers as they serve private equity clients. “Private equity firms are looking for providers who can address their needs up and down the capital structure,” says Hobbs, adding that “speed, efficiency and relationships matter when the markets are more choppy and volatile.”

To remain competitive, private credit providers will need to balance the need for capital to support existing borrowers, while also having incremental capital to use for new opportunities, Hobbs says.

For businesses facing slowing growth coupled with rising interest rates, junior capital offers a solution to bridge the gap before revenue picks up again. The high cost of capital, however, could be an obstacle to widespread use for this purpose, he adds: “I think that the market is still digesting in real time whether or not junior capital makes a ton of sense.”

Planting Seeds

Maintaining a competitive advantage doesn’t just apply to today’s deals; it also requires building the groundwork for future transactions.

Murray notes the importance of building relationships with business owners who may not be ready to sell immediately.

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“This is the time to plant seeds. This is the time to be out meeting people, following up with people, building long-term relationships and really focusing on sourcing,” Murray says. “When you’re really busy and you’re doing all kinds of deals, you don’t often have the luxury of time to be as disciplined about sourcing and really generating proprietary deal flow as we are right now.”

Ultimately, winning as an investor requires being nimble, a message that Hobbs hopes DealMAX attendees take away from the panel session in May.

“Markets are dynamic,” he says, “and so your ability to be flexible, forward-thinking and to react to change quickly puts you in an optimal position to be a leader in any space—private credit or private equity.”

Katie Mulligan is ACG’s content director, based in Chicago.