Navigating an Economic Crisis: Q&A with Five Points Capital
Brent Kulman, director of business development at Five Points Capital, shares how his firm is navigating fallout from the coronavirus and his view of the market.
Brent Kulman
Director, Business Development, Five Points Capital
Headquarters: Winston-Salem, North Carolina
Strategies: Private equity, private credit and small buyout strategies
Industries: Distribution and logistics; health care; industrial and commercial services; marketing services; niche manufacturing; tech-enabled services; and training and education
Website: www.fivepointscapital.com
Middle Market Growth spoke with Brent Kulman by phone on March 25.
Q. How is Five Points working with its portfolio companies amid the economic turmoil caused by the coronavirus?
We’re in close contact with all of our portfolio companies and are having a lot of discussions about the different impacts that they’re facing. Some companies are seeing minimal impact and others are seeing a more significant impact. We’re working very closely with them and looking at ways to get them through the crisis.
Q. How has your deal sourcing been impacted?
We’re still looking at new opportunities, but what we’re seeing out there is the number of deals that are being launched has declined dramatically. I’ve spent a lot of time on the phone—replacing my in-person meetings—with the deal community. I spoke with one very well-known firm that’s active in the lower middle market that basically said they’re not bringing anything to market this week and they’ll see what they do next week.
Looking at our deal counts, it’s clear that starting last week, there was a drop off. [As of Wednesday morning], it’s too soon to tell this week. My sense is we’ll see an even further decline.
“I think it’s too early to see how it will go longer term, but there are a lot of folks reaching out to us, and we’re reaching out to others saying we’ve got capital to invest and we’re looking to deploy it for the right opportunities. Back in the financial crisis, you didn’t have that message being sent out.”
Q. Have you seen valuations start to come down?
It’s too soon to tell. There were a number of things we were looking at before this became acute, and we’re seeing a lot of processes being put on hold. I think it’s too soon to say what the impact is on valuations. We’re just seeing intermediaries that are handling processes saying they’re going to put things on hold and defer bid dates and defer the process until they have a better handle on how this impacts not only the company they’re representing, but the overall deal environment.
Q. How do you expect this crisis to impact dealmaking and financial markets over the next 12 months?
It’s a bit too soon to tell; it depends on how this plays out. Clearly we are going to be in a situation where in the short term, credit is not as widely available as it was beforehand. Some lenders have issues with respect to marking their book of deals to market, which impacts their ability to access debt capital, which they can then re-lend. That’s going to impact valuations to the extent that leverage is less widely available, but I think it’s really too soon to tell how it’s going to impact valuations and activity. There’s going to be a pause for a while, and as the coronavirus passes through the economy, we’ll have a better sense of when we’ll see things flatten out and people getting back to work.
Having said all that, I think there’s select situations that may well move forward. I’ve also talked to intermediaries that have deals that are close to closing and remain on schedule, but I think those would only be for companies where they have done checks with their lenders and the lenders are ready to close, or where they’re not using external debt, or a situation where the underlying company operations are just not being impacted by what’s happening in the larger market.
Q. How does the investment climate right now compare to what it looked like in the early days of the 2007-09 financial crisis?
In that crisis, you had a lot more leverage in the system. And as you had the echo effects of major investment banks shutting down or being merged or dramatically curtailing what they were doing, you really had a liquidity crisis. There was very little financing available in the market. And it was sharp and it was fast. In this case, a lot of financial institutions are more conservatively capitalized. There’s a lot more fund dry powder among both private equity funds as well as credit funds—which have largely replaced the commercial banks as lenders to the leveraged deal community.
I think it’s too early to see how it will go longer term, but there are a lot of folks reaching out to us, and we’re reaching out to others saying we’ve got capital to invest and we’re looking to deploy it for the right opportunities. Back in the financial crisis, you didn’t have that message being sent out. People were sitting there in shock looking at Lehman Brothers go out of business one week, and Bear Stearns the next. There really was no deal activity at that point in time.
Q. We’ve seen a swift fiscal policy response at the federal level. To what extent will that impact M&A?
A lot of the thinking right now is directed toward one’s own portfolio. If you’re looking at a new investment, you don’t want to make that decision based on some government program that may change or may only be a stopgap measure to get you through the next two or three months and then hope it gets extended again, or that another program comes along.
If you’re going to do a new investment right now, you want to feel pretty comfortable that the company has the ability to weather whatever storm there is, and that could come down to the business model. For example, we’ve got companies in our portfolio that provide outsourced services that are largely delivered by technology, so there are no people that need to physically go onto customer sites. The companies are providing essential services to their customers that are unlikely to be shut off, as long as those customers stay in business. A company like that will be more attractive than a company whose workforce needs to go onsite to produce something or into facilities to provide some type of service, at a time when customers don’t want any outside people coming into their facilities until they know they’re not carrying the disease.
Read how other middle-market private equity firms are navigating the economic crisis.
