Advisors Star in Their Own M&A Show
Investment banks, who usually act in supporting roles in M&A processes, have recently been the subjects of their own deals. Here’s how some of the newly formed advisors are tackling a volatile market.
Investment banks are usually the ones advising clients on acquisitions or exits. But in the past two years, many were the subjects of their own deals, with some advisors acquiring smaller players, commercial banks buying up investment banks and other firms merging. Some say they’re opportunistically adding sector or geography expertise, while others cite market volatility as a reason for transacting.
A Q3 2022 Broker-Dealer Quarterly Update from KBW, an investment bank specializing in financial services, shows 18 financial advisor transactions in 2021 and 14 in 2022. That’s up from just five deals in 2020—a year negatively impacted by the COVID-19 pandemic.
Some of the interest driving investment banking transactions includes an unprecedented level of market activity, interest in inorganic growth, a strong desire for specialized expertise in certain sectors or products, and a proliferation of sponsors needing services, the KBW report says. Notable deals in the past two years include TD Bank buying Cowen, Piper Sandler purchasing DBO Partners, Huntington Bank acquiring Capstone Partners and Houlihan Lokey bringing in GCA Corporation and Oakley Advisory.
KBW’s report notes that investment activity among IBs could be lighter in the near term because of market headwinds. “Macroeconomic uncertainty has introduced a degree of skepticism amongst experienced acquirers in the space,” notes KBW, adding some buyers are cautious over projected revenue numbers at a time of lightened deal flow.
Many of the investment banking deals completed 2021 or 2022 were done when bankers were still riding high on record M&A volume. Between banks being stretched thin or wanting to have access to a bigger platform, it made sense to consolidate.
Deal volume started falling in the middle of 2022 following rising interest rates, the war in Ukraine, weaker economic conditions, inflation and other issues. In this environment, some advisors that have done deals say they feel more comfortable being part of larger platforms that have many disparate product lines and services to rely on during murky investment conditions. These could include help with turnarounds, restructuring, performance reviews, deleveraging advice, dividend recaps or minority stake sales.
In this environment, some advisors that have done deals say they feel more comfortable being part of larger platforms that have many disparate product lines and services to rely on during murky investment conditions.
Britt Terrell, head of capital markets at Palm Tree, a Los Angeles-based advisory firm, agrees that a variety of services help during market headwinds and can drive M&A activity between investment banks.
Terrell’s previous firm, Backbone Capital Advisors, which he founded in 2011, was a boutique investment bank specializing in private debt and equity capital raising. It was acquired by Palm Tree in January.
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According to Terrell, deal flow at the firm was “very lumpy.” He was the only one generating new business opportunities and sometimes there were dry spells. Now, as part of Palm Tree, he has the support of a much bigger infrastructure, over 100 people and a robust origination engine. Palm Tree also offers multiple services, including financial due diligence, carve-out and special situations advisory, capital markets solutions, sell-side investment banking, transition support and performance improvement, among others.
“I believed that the cross-pollination of ideas, referrals and introductions would be good. This, along with having multiple tools in your tool belt, is proving to be a formidable platform,” says Terrell, who adds that the job also allows him to focus on capital markets, while others work on M&A.
Capstone Partners also saw potential in merging with another firm to broaden its service offering. Capstone was acquired by Huntington Bancshares last June, creating a full-service organization across investment banking, capital markets and commercial banking for middle-market businesses and founders, a press release on the deal said.
For this deal, Capstone Partners founder and president John Ferrara had also been looking for an investor to help accelerate growth. Ferrara says he was interested in a private equity partner to execute on an aggressive growth strategy to double the firm via a series of acquisitions. The growth strategy includes strengthening Capstone’s industry coverage with a focus on healthcare and technology, expanding the firm’s national footprint in the Southeast, Midwest and West Coast, and adding new capabilities, such as fund placement and buy-side M&A services.
KBW advised Capstone Partners on its sale to Huntington Bank and DBO Partners, a San Francisco-based tech investment bank, in its sale to Piper Sandler last year.
Piper Sandler already had a large technology practice, though there was room to grow with the DBO acquisition because the “opportunity set in technology is so large and DBO created additional scale to capitalize on the growing importance of the sector,” says Mike Dillahunt, global co-head of investment banking and capital markets at Piper Sandler. He notes that technology encompasses many different sub-sectors and adding expertise was helpful. Piper Sandler currently covers application software, digital media, technology services, FinTech, hardware and cybersecurity, among other areas within tech.
In another 2022 deal, Houlihan Lokey acquired Oakley Advisory last November, and Scott Adelson, co-president at Houlihan, says London-based Oakley helped expand technology coverage in Europe. “We have a very strong presence in digital infrastructure in the U.S., but we did not have that in Europe,” he says. Oakley brought its expertise in European telecom and digital infrastructure to Houlihan.
Friend or Foe
Capstone’s Ferrara says despite the current dealmaking slowdown, middle-market M&A never goes away. “Sometimes, economic headwinds push volume out for a while, but that creates a pent-up market dynamic that is eventually uncorked like a bottle of champagne,” he says, referencing the 2021 post-COVID deal frenzy.
Ferrara predicts the next cork will pop off sometime in the beginning of the year, potentially driving further consolidation in the investment banking world. It’s a scenario in which would-be rivals can suddenly turn collaborators.
Palm Tree’s Terrell and Stephen Rossi, head of investment banking, first met in 2009 at an ACG Los Angeles event, though they had been traveling similar paths in the industry for some time. Rossi worked at Bank of America, while Terrell was at Wells Fargo in the early 2000s. In the late aughts, they joined private equity firms, with Rossi covering capital markets at Platinum Equity and Terrell taking up the same job at The Gores Group.
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When they met at the Los Angeles event, Rossi spoke on a panel that Terrell had been a speaker on previously. Terrell introduced himself afterwards and Rossi recalls, “I looked at him like he was my opponent,” because they were competitors at the time (although the private equity firms they worked for, Platinum and Gores, were run by two brothers, Tom and Alec Gores, respectively).
Rossi and Terrell had kept in touch since, and worked on deals together. Rossi co-founded the Palm Tree investment bank in 2019 and engaged Terrell to line up debt financing for M&A transactions that Palm Tree was advising on. “We migrated from opponents to business partners,” Terrell says.
Rossi invited Terrell out to lunch last summer and asked him what his long-term plans were. That lunch was the genesis of their deal talks.
Terrell admits there were some drawbacks to consider. “There are more mouths to feed and I share less of the profit, but I like it so far,” he says. The fact that Rossi and Terrell have followed a similar trajectory in the industry helps them in their work now, they say. “We think alike and usually agree on how to advise on situations,” Terrell says.
Anastasia Donde is Middle Market Growth’s senior editor.