Dealmaker Insights

With the recent explosion of antitrust developments in the United States, members of our Corporate and Antitrust & Competition teams have come together to produce a three-part series that discusses the practical impact of these developments for our clients. In this third and final episode, Reed Smith partners Anatoliy Rozental and Ed Schwartz team up to talk about merger planning during these times of uncertainty.

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Transcript:

Intro: Hello and welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content please contact our speakers.

Anatoliy: Hi, everyone and welcome back to Reed Smith's podcast series, Dealmaker Insights. I'm Anatoliy Rozental, Private Equity M&A partner based in our New York office. With the explosion of developments in the U.S. antitrust space. I’ve teamed up with our antitrust and competition team to chair a three part series where we will be discussing the practical impact of recent developments and key priorities for our clients. Our third and final episode, I'm honored to be joined by my partner Ed Schwartz, who was a member of the global antitrust competition team and who is at the forefront of some of these antitrust battles. Ed, thank you so much for joining me today.

Ed: It's a pleasure to be with you today. Anatoliy.

Anatoliy: Thank you, Ed. So let's dive right in. We've all heard and read so much about the changes in antitrust enforcement under President Biden, especially when it comes to mergers. We've also heard that these changes have made it more difficult to get deals through both the DOJ and the FTC. So do merging parties really need to approach the merger enforcement process differently today than they did even four years ago?

Ed: I think they do Anatoliy. Look, we all know that President Biden came into office with a mandate which I think can more accurately be described as a dictate from the progressive wing of the Democratic party to bolster antitrust enforcement, especially with regard to mergers and beginning with the appointment of Lina Khan to chair the FTC and the appointment of Jonathan Kanter at the antitrust division. We've seen the White House act on that mandate. And each of them Khan and Kanter has implemented changes at their respective agencies that have made getting many deals through the agencies more challenging. Now, the good news is that we have not seen a dramatic increase in the number of cases being investigated through a second request or being challenged in court. And that was expected by many of us. We've seen fewer in fact, particularly at the FTC. And there are a lot of reasons for that, that I don't really have time to get into, but still for parties who are trying to navigate the merger enforcement process deals that potentially raise anti-competitive concerns. And I'm talking about deals where there is a significant horizontal overlap between the parties or maybe because it's a vertical transaction which could be seen as potentially threatening to rivals of either the buyer or the seller. These parties do need to adjust their strategies for dealing with the antitrust agencies to adapt to the changes that we've seen.

Anatoliy: So, what do you think are the biggest changes in merger enforcement that you've witnessed that are impacting parties today? They're trying to navigate the merger enforcement process?

Ed: Well, it's a lot, but maybe I can speak first in broad strokes. Uh I think the changes made by the agencies fall into three broad categories. First, the agencies have broadened the scope of deals that the agencies consider to be potentially anti-competitive. Second, they've implemented changes that couldn't make getting a deal through more difficult and take longer if the agency decides to investigate. And three, the agencies have also made negotiating remedies for a challenge deal in order to win approval more difficult. Now, let me take those one at a time. So with respect to broadening the scope of deals, the agencies may find to be anti-competitive. Let's take a look at the recent revisions to the horizontal merger guidelines, which in a number of ways, they really both broaden the scope of deals that may be subject to investigation and a suit to block and at the same time, lowered the bar for merger challenges. So for example, and really importantly, the revised guidelines state that a proposed transaction will be viewed as presumptively unlawful if it results in a post merger combined fare of 30% that is a market share of 30% by the merge firm or in HHI of 1800. These are significantly lower thresholds than we saw in prior guidelines and they're really much lower than the thresholds the courts have generally viewed as raising anti-competitive concerns. So those are two examples both coming out of the revised horizontal merger guidelines. Um Second, though the agencies have now stated that a vertical merger will be viewed as presumptively illegal if either party has at least a 50% market share. This is new. And it's also consistent with the fact that we have seen notable challenges to vertical mergers in the last few years such as the FTC suit to block the aluminum rail transaction. And that by the way is a case that the FTC lost before the FTC administrative law judge. I think we also have to look beyond what the FTC has said in the revised horizontal merger guidelines because the FTC has issued other notable policy statements including a broad general statement of enforcement policy that addressed merger enforcement policy. And there the commission said that mergers that don't violate Clayton Act Section 7, which is the federal law establishing the standard for merger enforcement, could still violate Section 5 of the FTC Act. That's a radical statement. So what the FTC is saying is that even if under the body of case law that's developed over the last many, many, many decades and under FTC policy, a merger would be deemed to be legal that they still may challenge it under Section 5. The FTC has also said that it is abandon the consumer welfare standard in analyzing mergers even though this has been the touchstone for merger analysis for decades. Now because the FTC hasn't, hasn't provided much in the way of guidance as to just how they analyze deals. We're really left with the commission pretty much saying we can't really tell you what the standards are, but we'll know in anti-competitive merger when we see it and that's really not much of an exaggeration. So let me turn now to getting the deal through once an investigation has been opened. And what we're seeing there is more of a practice than a stated policy by the agency. The investigations that are launched are taking longer and the burdens on merging parties in navigating the investigation process is generally greater. So, put another way what we're seeing in many cases is the agencies using their discretion more often to be less flexible in negotiating the scope of second request and overall taking more time to conduct the investigation. And this of course, can imposed an enormous toll on the parties and in some cases threatened or even kill the deal. Lastly, remedies. Both the FTC and the Antitrust division have expressed deep skepticism about the effectiveness of merger remedies in fixing the problems they see arising from problematic mergers. This is also significant because if the agency isn't willing to negotiate a remedy, the only remaining options are to litigate or abandon the transaction.

Anatoliy: So given all of that, how can merging parties adapt? What, what should they be doing differently today than they were doing four years ago? What, what are we supposed to be telling our clients?

Ed: Well, that's really a $60,000 question, isn't it? And I would highlight three things. The first, I think parties need to take into account the risk of a long investigation. And I'm talking potentially as long as 18 or even 24 months in the parties' deal documents if you would think an investigation is likely. And I'll add that this is especially true if the deal may be investigated in other countries. In which case, the U.S. agency may slow roll the investigation even more. Also, given the greater risk, parties need to be especially thoughtful. And I think even creative in thinking about clearance risk allocation between the parties and possible outcomes when negotiating the deal documents. The second thing that I think parties need to focus on arises from the following reality and that is that the agencies hold most of the cards in a merger investigation. They really do. But there is one card that the parties can play and that is a willingness and ability to litigate. So what that means is that if an agency is jamming the deal up, the most effective thing the parties can do is to when they get to that point, certify substantial compliance with the second request. Now, the agency may say they don't agree. You haven't, you haven't complied. But the parties can say as far as we're concerned, we have complied. Tell them that, tell the agency that the parties plan to close and that they can sue if they want. But, that means the parties have to be prepared to litigate. And that what that means is that they should develop an effective litigation strategy early in the planning process. This is an important change, but it is the reality of navigating the merger clearance process today. Ultimately taking the dispute to a federal court means the agency has to prove its case under the enormous body of merger law that's developed and that's where the parties get leverage, even the threat of litigation and demonstrating a willingness to do it. That's what gives the party much greater leverage in an investigation. Importantly, here, remember the, if the agency sues to block a deal, they bear the burden. Also notable is the fact that the agencies have a string of losses in the courts and merger cases. So again, the parties can and should use what they have. There are only so many cases the agencies can litigate and their track record hasn't been very good. So the key takeaway here is a willingness and ability to litigate is the leverage parties have. They should use it when necessary and be prepared to do so. Third, let me get back to remedies. Um I think what parties need to be doing on that score is to be prepared early on to advise the agency, what the parties are willing to do to get the deal through. So the party should begin this process early in the planning. What is the buyer prepared to give to get the deal through? It is often in the party's interest to consider that up front, especially if you're, if you're representing the buyer. Look, the agencies know that if the parties have put an effective remedy offer on the table, the agency's chances of losing in court has just gone up and it may deter them from simply laying down the gauntlet and saying we're not willing to negotiate, you can walk away or will sue you. And so this is why we've seen the agencies more willing to negotiate remedies than their words would indicate. And also then if litigation ensues the parties are in a much better place, if they can argue to the court that even if the deal does reduce competition, the proposed remedy effectively restores it and that the agency shouldn't and can't get any more than the parties have offered. Now, let me add one last point about strategy in dealing with the new merger world we're in and it's what I wouldn't do. What I wouldn't do is to change the arguments I would make to the agencies in fundamental ways. And that's even before the FTC, despite the policy statements that they've made about abandoning the consumer welfare standard and everything else, and this goes back to my second point, the agencies ultimately need to prove their cases in court if the parties are willing to litigate. So, while the FTC might say we've abandoned the consumer welfare standard and we're doing things completely differently today because the old order doesn't work. They still have to prove their case before a court of law if the parties are willing to litigate and the consumer welfare standard is still the Touchstone for merger analysis in the courts and it probably will be for a long time to come. So I think the bottom line here is that just because the agency have veered left, that doesn't mean that the courts aren't still driving straight down the middle of the road.

Anatoliy: So Ed, and we, we, of course, that's the current state of the world. Of course, we have an election coming up. So I will ask you to look into your crystal ball and tell us what you expect to happen in connection with the election. So do you see changes happening with the type of president that is elected or with an incumbent retaining its seat in office?

Ed: Yeah. Well, that's a very good and timely question. We're not that far away from an election and possibly a change of administration. So the short answer is yes, we will see changes and it of course, depends on what happens in November. Look, I think first if Trump is elected, I think we will see rollbacks of many of the changes we've seen in the last three years. And also just, you know, gazing a little more deeply into my crystal ball, if Trump is elected, I won't be surprised to see merger review with the antitrust division and maybe even at the FTC to become more politicized. And that could be a wild card for merging parties. And you know, if Biden's re-elected, I still think that we're going to see some changes, especially at the FTC. I wouldn't be surprised to see more of an institutionalist at the helm, appointed as chair of the FTC. I think the White House might want to see someone who is viewed as more able to get things done than the current chair. And you know, I think who ends up in control of Congress, both the House and the Senate could also affect merger enforcement, especially if the Democrats lose the Senate and Biden is reelected. Look, you know, he's gonna have to get his, his appointments through his nominees through Senate confirmation and that could have an impact and look if the Republicans control both chambers, they, they control the budget and that could also have an impact as well. So either way we're going to see some changes, I fully expect that exactly what those changes will be. I guess we'll just have to wait and see.

Anatoliy: Thank you, Ed. That's all the time we have for today's episode. And thank you to everyone for tuning in. This is the last episode of the series and we hope that everyone has enjoyed it. If you have any further questions or comments, or like to reach out to any of the speakers. You can please find all of our bios on the Reed Smith website. We look forward to staying in touch about these topics or any future topics until next time. Thank you so much.

Outro: Dealmaker Insights is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's corporate and financial industry practices, please email [email protected]. You can find our podcast on Spotify, Apple Podcasts, Google Podcasts, reedsmith.com and our social media accounts.

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.

All rights reserved.

Transcript is auto-generated.

With the recent explosion of antitrust developments in the United States, members of our Corporate and Antitrust & Competition teams have come together to produce a three-part series that discusses the practical impact of these developments for our clients. In this episode, Reed Smith partners Anatoliy Rozental and Chris Brennan discuss new U.S. merger guidelines.

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Transcript:

Intro: Hello, welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content through this series, please contact our speakers. 

Anatoliy: Hi, everyone and welcome back to Reed Smith's podcast series, Dealmaker Insights. I'm Anatoliy Rosental, private equity and M&A partner based in our New York office with the explosion of developments in the US antitrust space. I've teamed up with some of our antitrust and competition team to chair a three-part series where we'll be discussing the practical impact of recent developments and key priorities for some of our clients. For our second episode, I'm joined by Chris Brennan, who is a partner in Reed Smith's global antitrust  and competition team and whose practice is at the forefront of these antitrust battles. Chris, thank you so much for joining me today. 

Chris: Thanks, Anatoliy. Always good to work with you and especially for today's discussion which focuses on a major development on how our clients evaluate and plan for merger clearance issues in the US. 

Anatoliy: So let's, let's jump right in. You know, this episode is focused on the US Department of Justice and the Federal Trade Commission's 2023 merger guidelines. So to start at the beginning for our listeners who may not be familiar with the history, you know, I understand that the first guidelines were issued way back in 1968 and there have been several iterations since then. The 2023 guidelines consolidate, revise, replace the various versions of the merger guidelines issued by the FTC and DOJ. And can you give us a brief background of what these guidelines represent? 

Chris: So, the stated purpose of these guidelines is to help the public business leaders, practitioners that would be you and I and courts understand how the agencies consider certain issues when investigating mergers. The ideas is that they reflect the agency's current approach to merger enforcement and provide you and me and the larger community insights into how those mergers are going to be analyzed at least for the current agency leadership. And just so we're all on the same page. US law requires companies to file a notification that's known as an HSR filing to the FTC and DOJ for a proposed merger that at least for this year in 2024 is valued at or above 119.5 million. Once that filing is submitted, the agencies have 30 days to decide if they want to further investigate and potentially challenge the merger and critically the parties cannot close the deal while that process is playing out. So while these guidelines are non binding, you should think of them as the playbook for DOJ and FTC personnel that review those filings and that playbook is how agency leadership expects them to analyze a merger during the 30 day review period, and whether to let that deal close or to pump the brakes and investigate further. 

Anatoliy: Got it. So are the 2023 guidelines, another incremental change or is this something more groundbreaking? 

Chris: So it's definitely groundbreaking, but potentially not in the normal sense of that phrase. The agencies have touted these guidelines as necessary to address quote unquote the modern economy. Yet many of the legal authorities that the agencies rely on for significant changes in these guidelines are based on pre 1980’s case law and many of those authorities have been ignored or rejected by courts over the last 40 years as modern economic theory has shifted our view of how mergers affect markets and outcomes for market participants. Critics of these new guidelines have noted that there's an obvious tension between claiming to update the guidelines for a modern economy while seeming to adopt the pre economics era of antitrust enforcement. But if you take a step back, that approach makes perfect sense, if you think about the Biden administration's view of today's modern economy, and they've characterized that as one marked by excessive corporate consolidation and a need for enhanced merger enforcement. Consistent with that view, these 2023 merger guidelines clearly signal an appetite for stronger enforcement, more theories of potential harm to competition and likely longer investigation periods for our clients. 

Anatoliy: Ok. So in light of this new approach, can you walk our listeners through the major changes and how the DOJ and FTC are analyzing mergers for potential competition concerns? 

Chris: Sure, I should be clear that there's a lot in these guidelines but for purposes of today's episode and for our listeners, I want to talk about three of the most widely applicable changes. First, the guidelines significantly lower the threshold that agencies use to assess whether a merger is presumptively anti competitive. Generally, a merger that creates a firm with a market share of greater than 30% is likely presumed to be an anti competitive under these new guidelines. And so these guidelines are going to make an entirely greater class of mergers presumptively anti competitive. The guidelines also substantially reduce the presumption thresholds for the Herfindahl–Hirschman Index which is known as the HHI index which analyzes the change in concentration of market shares across all the competitors in a relevant market. I don't want to get too deep into the numbers of that analysis, but one way to think about it is that these revisions place far greater scrutiny on what we call a 6 to 5 merger where you start with six competitors, there's a merger and now you're left with five. Before these guidelines, those mergers were less likely to raise anti competitive concerns. And certainly under this new approach, anything more concentrated such as a 5 to 4 merger is absolutely gonna trip the new guidelines. I should note that this is a rebuttable presumption. And the agency has made clear in the final version of these guidelines that it's a rebuttable presumption, but they're saying it's rebuttable while at the same time saying you're gonna need really good arguments to get over that presumption. And if you're in a significantly higher market share above 30% or substantially below the thresholds for the HHI index, that's really gonna be an uphill battle. You're gonna have to fight really hard and potentially go to the courts if you wanna push that deal through. So second, I wanna talk about vertical mergers and obviously by that, I mean, a merger that's not between direct competitors, but something like a merger between a supplier and a manufacturer. The guidelines now suggest, don't declare but suggest the presumption against mergers in which there's going to be a market share of 50% or greater in the related product. And that's the product by which you could use to foreclose other rivals access to the market. This is an area where the agencies are clearly departing from case law because there's never been a presumption that a 50% share would make a merger unlawful. And I think they're gonna have a really tough time pushing that through the courts. And it'll be interesting to see how much they try to push those cases and challenge those mergers uh to test this new approach. Third and finally, I wanna talk about deals that involve nascent or com or potential competitors. And this includes both actual potential competition where one of the merging parties has real plans to enter a market as well as perceived potential competition where current competitors are disciplined by a perception that one or more of the merging parties could enter the market. The guidelines claim that and I'm quoting here in general expansion into a concentrated market via internal growth rather than via acquisition benefits competition. In other words, they don't want you to see, they don't want to see a entity buy its way into a market. They wanna see it build its way into the market. And we've seen this theory in the fintech space, in virtual reality. It's particularly applicable to emerging technologies and I'm sure we'll see it in acquisitions related to artificial intelligence. My view is these challenges are gonna rise and fall on the specific facts and players and that's consistent with the agency's mixed record in challenging these deals to date. 

Anatoliy: Generally sounds like scrutiny is increasing across the board. But are there any potential industries or types of entities that are specifically targeted in these new merger guidelines? 

Chris: There are and we should begin with a shout out to your first episode with my colleague Michelle Mantine because private equity is definitely in the crosshairs of these new guidelines. And I know you and her talked about that issue in detail. So if you're listening and that's applicable to your world, then please go back and check out that episode. Let's also talk about two other subgroups and that's platforms and labor markets. A multi sided platform is defined as a product or service in which participants provide or use distinct products which contribute to the attractiveness and use of the platform overall. Just for some examples, think about companies offering digital services like app stores, buyer and seller platforms and social media companies. The agencies make clear that the guidelines will apply even if the competitive concerns do not arise on all sides of the proposed market. And they'll consider competition between platforms, competition on the platform, and competition to displace the platform. My view and it's sort of reading the tea leaves here is that platforms are gonna play an increasingly important role in a lot of industries as technology and software continue to infiltrate all aspects of our lives and the agencies are sort of ahead of that shift, ensuring they have a very flexible approach on when those acquisitions are up for review. Second, let's think about labor markets. Unlike the prior merger guidelines, the 2023 edition include extensive discussion of possible harm in labor markets resulting from combinations of employers, they compete for talent. We've seen this and I'm sure you're familiar with an increasing focus on labor markets in all contexts including outside the merger world. And the guidelines confirm that agencies will be reviewing deals for a number of possible effects to labor including lower wages, slower wage growth, the degradation of workplace quality and forcing workers to be pushed into the job market. In response, merging parties should consider how they would respond inquiries on labor issues. And in particular should think very hard about how efficiencies related to head count are addressed in their internal analysis and the calculations of potential synergies. 

Anatoliy: So let's now talk about impact. Do these guidelines prevent our clients from considering certain acquisitions or exit strategies? 

Chris: So I noted at the beginning that these guidelines aren't binding on the on the agencies and I should also clarify that the guidelines have no legally binding effect on courts. And it may be a really tough sell for many judges given that these guidelines depart from existing and widely accepted principles of merger analysis. So again, the law is not changing here. Moreover, these guidelines are generally seen by antitrust practitioners as essentially memorializing an enforcement strategy that has been in effect since this current administration took over in 2021. And in large part, that approach has failed to produce results in merger litigation. The agencies have lost most of their efforts to enforce the more novel theories in these guidelines. And there's really little reason to think that that's going to change simply because the agencies have published their playbook. That said, defeating the FTC or DOJ in a merger challenge is a massive undertaking. And the agency's track record has not deterred them from being exceedingly aggressive in enforcement efforts. I'll leave you with two perspectives on impact. One clients shouldn't slam the brakes on deal activity just because the temperature in the room has increased. At the end of the day, the vast majority of deals go unchallenged in large part because agencies only have so many staff members to do the work. So work with your antitrust counsel to get a deal specific assessment of where you fall across the potential enforcement spectrum. But second, there's no doubt that this administration has adopted a deep skepticism of large companies becoming larger. A draft version of these guidelines went so far as to claim that any merger by a company with at least a 30% share would be subject to heightened scrutiny. If you're in that universe, I think you need to factor into acquisition planning and should consider what deals are most likely to create real shareholder value over the next eight months of 2024. 

Anatoliy: Is there anything our clients can do in response to these changes? 

Chris: I think all the common and classic suggestions apply, right? And you and I have talked with clients about those all the time, right? Think about your documents, get planning early, prepare your arguments. But in light of these changes, I think the best thing you can do is actually integrate your antitrust counsel into the acquisition planning process. Not just after you have a potential target. I know I've had a number of clients reach out and say here are our goals and some potential ideas. What do you think? And the great thing about that approach is we're helping the key personnel at the company understand how to be proactive in developing short and long term acquisition strategies that are aligned with current enforcement attitudes. So we're avoiding a scenario where the board hears about this amazing opportunity. And then only later down the road hears about all the potential antitrust risks that can make it hard to push through if you can write size and right time your client's acquisition strategy, you're creating tremendous downstream efficiencies in how you'll subsequently defend that deal before the agencies. Similarly, I think client should be more willing to consider filing on a letter of intent versus fully signed Comprehensive Agreement. The HSR rules have always allowed both scenarios and I think there are certain deals where an lo I makes more sense because you can get the agency's reaction to the deal before you incur 100% of the due diligence burden to be sure you can't just send in a hypothetical deal and you have to certify that you have a good faith intention to consummate the transaction. But I think where you can get a seller on board, I think it's a really interesting approach for certain transactions. 

Anatoliy: Definitely. And it's, it's certainly one that you've recommended for our clients on, on many transactions before and been successful approach that we've taken. All right, Chris, last question for you and I'm sure it's one that you're getting at a lot of cocktail parties these days, but with the close of the first quarter of 2024 and as we're barreling toward a presidential election in November, could the results of that election affect the lifespan of these guidelines? 

Chris: So the short answer is yes and obviously neither you nor I have a crystal ball on how things are gonna play out. But uh let me give you a reason to think that's not just possible but potentially likely. The DOJ and FTC issued the vertical merger guidelines in 2020 under the Trump administration. Just about a year later. The FTC rescinded those 2020 guidelines after the Biden administration appointees took control. So we'll certainly be paying close attention to how there's discussion of monopolies as well as the economy at large on the campaign trail. And hopefully you can have me back for a follow up episode on how this election will impact the merger outlook for 2025. 

Anatoliy: Perfect. That's all the time for today. Thank you to Chris for today's episode and thank you to everyone for tuning in. For part three, I'll be joined by my partner Ed Schwartz and we'll be discussing merger planning in the age of uncertainty, FTC Section 5 and beyond. We hope you can all join us then. Thank you so much. 

Outro: Dealmaker Insights is a Reed Smith production. Our producer is Ali McCardell. For more information about Reed Smith's corporate and financial industry practices, please email [email protected]. You can find our podcast on Spotify, Apple, Google, Stitcher, reedsmith.com and on our social media accounts at Reed Smith LLP on LinkedIn, Facebook and Twitter. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

All rights reserved.

Transcript is auto-generated.

In our latest Private Equity Spotlight series, Brian Murchie, senior client development advisor at Reed Smith, is joined by Rush Harvey, Director, Private Capital Advisory at Raymond James, to discuss the unique perspective Rush and his team bring to the market, and the state of the fundraising and secondary markets.

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Transcript: 

Intro: Hello, welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content through this series please contact our speakers.

Brian: Welcome back to Dealmaker Insights. Excited with the new series spotlighting the private equity industry. My name is Brian Murchie. I'm the Client Development Advisor at Reed Smith. My personal background is I started out at Platinum Equity on the business development team for seven years. From there, I moved into in an investment banking role. I was with Stifel in a West Coast sponsored coverage role. And then from there, I moved over to Raymond James also as a managing director in a sponsor coverage role and excited for Rush Harvey, who's a good friend of mine and a, and a, and a former colleague at Raymond James, who's in a private capital advisory side. I think he brings a very unique perspective given where he sits in the market and the state of the market. So welcome rush and excited to have you on here How are you doing,

Rush: Brian I'm doing awesome. Thanks so much for having me today.

Brian: Great. I think you bring a very interesting perspective. Rush just given your background and kind of where you sit in the market. Could you discuss your transition from being a former LP to to the private capital advisory side?

Rush: Sure, thanks Brian. It's been a journey that's for sure. I was a limited partner my entire career up to joining Raymond James on the private capital advisory side about two years ago, most recently managing the endowment with the team at Kansas State University Foundation and then at the Texas A & M University Foundation. So go cats and gig em’  Aggies. And it's been a great transition to the private capital advisory side to bring an LP perspective to how we do business, how we serve our clients and ultimately how we try to be a source of relevant deal flow to limited partners.

Brian: and Rush I, I did notice you have a recent article out there that you published. Uh could you kind of  discuss that? Like I know it discusses, you know, your background and kind of your entrance into the private capital advisory space. But if there's anything there you could touch on, it would be helpful.

Rush: Yeah. Happy to Brian and, and thank you for reading. I appreciate that. The title of the article is Reflections From the middle seat. So in, in the current role we are serving GPs, sponsors and also limited partners, LPs. And so we want to be as helpful as possible to both. And, you know, sitting in the middle seat on the airplane usually isn't the most fun, depending on who you sit next to. But in the current role, I'm having tons of fun because the market needs support in regards to fundraising. It's such a tough fundraising market right now. So GPS need a partner to help them navigate and we're trying to be a good partner in the market. But limited partners, they need good deals and they wanna work with folks, they trust and you gotta earn their trust. So sitting in between LPs and GPs, I have a pretty unique perspective. You know, being an LP understanding the hard work it takes to execute a process to get a deal done, to find the right partner to help you serve your institution, to enhance your mission. For me at two public land grant university cities. The mission was so important, thinking about those kids that we served and the scholarship dollars we tried to generate and making those private capital commitments really, really mattered and we had to have good partners. So trying to be a source of those types of great deals for those limited partners and then helping GPs, you know, tell their story in a way that resonates with those limited partners. And you know, the best private capital advisory firms play that role in the middle seat, but then they get out of the way when it makes sense and, and you let the LP and the GP build that relationship and, and stay as active as you can to be a good partner to help them ultimately build that relationship more formally. So, it's been fun.

Brian: Thanks Rush. That's uh a wonderful insight here. And I, I think that's a good segue into kind of the state of, of the fundraising market. Could you just kind of touch on, you know, like the current state of the fundraising market and how this year is a little different than last year over how it might face a lot of the same uh challenges.

Rush: For sure. To say it's tough would be a massive understatement. Limited partners just don't have the capital to deploy like they did a few years ago, you had public markets really underperform a few years ago, which makes allocations to privates go up, which means you have less budget for capital deployment. And so with the public markets being volatile, budgets got tight and they're still tight because private markets have continued to perform. But now you have public markets coming back. So what we're trying to help our partners understand is you've got to play the long game, you've got to expect to be in market longer. And there are a few boxes you have to check for limited partners given how tough it is from a capital deployment standpoint for them, the boxes that you have to check. So deals are getting done, capital is being raised, but it's taking much longer for funds to reach their target. And it's really been a biased mark in regards to fundraising, the bigger funds, those raising 10 billion and above have seen a lot more success than those groups raising 10 billion and below. That could be a flight to quality for LPs. It could be working with managers where they have longer lasting relationships as well in the more mid and large cap part of the market. Some of the data doesn't tell you exactly why LPs are favoring larger funds. But you've seen capital flow there in a much bigger way than in your past. That is what we're seeing. But at the same time, it's still tough for everyone outside of a few larger names.

Brain: Yeah. Thanks Rush. Yeah, I know. It's tough out there. I mean, in your seat, have you seen a fund that has historically had, you know, a good size fund, let's say they raised 650 million and, you know, they've been trying to raise, you know, another fund and can't, can't quite get to 650 but, you know, they can raise 500 so they're able to raise a smaller fund and, and they've said, ok, you know, let's just raise, you know, like a smaller fund on our next one and we'll deploy this app write some larger checks and then, you know, we'll go back to market in a couple of years when, you know, like the fundraising market might be a little different?

Rush: Sponsors in that situation are taking what they can get. So if they can't get to their former fun size, there is that conversation of, hey, let's get to a third number and go execute our process. I do think LPs in the future will look at a down fund with a little more grace than they would have in the past raising a smaller fund. Or it being significantly less than what you tried to raise was an absolute negative for most folks because you're trying to raise more capital. You've hired more people, you wanna do more deals and you don't get there just a bad sign in the market. But given how tough it is now, if it was 650 you raise 550 for the next one and you can help folks understand why. Hey, we had a strong re-up from our current LP base. Hey, we did bring in some new LPs. We saw the writing on the wall with the market. We didn't want to be in market 18 months. We want to execute our process. We want to put money to work because this could be our best fund ever and come back later to your point when things are more normalized. I do think most LPS will understand that. But also if it is a smaller fun explaining to the market, why you don't have to let people go, why you can still execute, why the pipeline is still going to be robust, et cetera. But that example, 650 to 550 isn't that material but say it was 650 then you raise 300 then you're hoping to go get a bunch of co-invest to do similar size deals, but you haven't done a lot of co-invest in the past. That's something LPs are really, you know, trying to avoid. So there is grace in the market, but you wanna make sure you can get as close to your target as possible. And that's where we're seeing a lot of demand for our services because we can come in and help tell that story, connect them with the right pools of capital. I want to see those types of opportunities to help them get to that part to help them get to that target. Wearing the old LP hat comes in handy here because I was always concerned about, hey, are you raising too much capital? And if you're increasing your fund size by 20% or 100% why, why can you execute the process? Why is it still reputable? Why is it still relevant? And so we're asking those same questions as a placement agent partner to ensure that we can get LPs interested in the mandate and answering the fund size question because it's usually the top five question that LPs want to understand when they look at a new mandate.

Brian: Got it. No, that's very helpful. Thanks, Rush. And could you kind of give us, you know, like a state of uh the uh the secondary market and how it compares to last year? You know, I know, you know, continuation vehicles had certainly been increased over the last, you know, a year or so. So just, just kind of curious your, your thoughts on that and the the current state of the market with that?

Rush: The secondary market is here to stay and the amount of GP led transactions we believe will continue to increase, you know, going back over time. LP led secondaries for the majority of market value and GP led volume has continually increased. If you look at the last five years, it's essentially doubled and we expect that to continue over time because GPs need ways to enhance their liquidity via generating it. And it's harder to do that in an environment like we're in today. Distributions, back to LPs, are essentially at all time lows. Contributions and distributions in regards to the mix, they're not equilibrium. And so that's a problem for LPs in regards to committing capital, they're used to the money coming back from their PE relationships, using that capital to contribute to the next fund and they can't do that. So a continuation vehicle. A GP led secondary is a new technology that allows sponsors to generate that liquidity, lots of skepticism in the market in regards to LP sentiment on these structures. And we advise all of our clients that you have to do these deals for the right reasons. You've owned the asset for at least three years, you love the asset, you're going to provide a great return to your LPs. If I underwrote a GP for a three X net return and a CV is coming my way to analyze and I'm gonna get that return that I underwrote, I'm gonna have a much higher probability of being open to doing a secondary. But if it's a 1.4 X, they've held it for 18 months, it's like, why are you doing this and we really work with our partners to make sure that they get support from their LP base. And if LPs love the deal, they can stay in it. But if they need that liquidity, which is what most LPs need right now, more than ever, they can get the return, they underwrote on that deal and they can use that capital to contribute to that GPs next primary or to commit to another opportunity. And we will help them find new investors on the secondary side to come in at the new valuation. And there's more and more capital looking for GP led secondary transactions than ever before. You've seen Lexington raise a $23 billion fund. You've seen groups like HarbourVest and a uh continue to commit capital to these types of deals. And there are more new entrants in the market focusing on GP leds. So we're excited about the market, but we wanna make sure all of our deals really pass that quality a threshold so they can be successful in the market or the selling LP feels good and the new partner for the GP feels good.

Brian: Thanks Rush. That's very helpful and just given all all that and with your background into your new role here that you can discuss, you know, the Raymond James entrance into the private capital advisory market.

Rush: Absolutely, really proud to be in this business a few years ago, let's say three years ago, if a sponsor needed help raising a fund raising capital for deal by deal or doing a secondary, they weren't calling Raymond James a lot of great competitors and peers in the market that were in that business winning those mandates. And Raymond James said, look, we need to compete here from a middle market, investment banking standpoint, always very competitive and very proud of our business. But private capital advisory was essentially a hole and made an acquisition of a boutique placement agent, secondary advisory firm, Cebile Capital based in London. Cebile was founded by my boss Sunaina Sinha and Raymond James got to know Sunaina bought her business and the goal has been to replicate what Sunaina built in Europe, a great business replicate that here in the US. And I was hired a few years ago to be on that team to help grow that US business and really proud of the work we've done. We've got about 60 people on our team today with offices in LA, Chicago, New York, West Palm. I'm down here in Houston, then half the team is in London. So just getting started, you know, we've been in this space under the Ray J umbrella for almost three years and again, just really proud of, of the team that we're on and excited about what's ahead uh to be a good partner in the market.

Brain: Thanks Rush. That's all the questions I had for today. You know, it's really a interesting time in the market. You know, I certainly appreciate your time to join us on Dealmaker Insights and I wish you and your team and uh Raymond James all the success here in 2024 and uh looking forward to staying in touch.

Rush: Thank you, Brian. Really appreciate you having me on the show today and can't wait to listen to future episodes.

Outro: Dealmaker Insights is a Reed Smith production. Our producer is Ali McCardell. For more information about Reed Smith's corporate and financial industry practices, please email [email protected]. You can find our podcast on Spotify, Apple, Google, Stitcher, reedsmith.com and on our social media accounts at Reed Smith LLP on LinkedIn, Facebook and Twitter.

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.

All rights reserved.

Transcript is auto-generated.

With the recent explosion of antitrust developments in the United States, members of our Corporate and Antitrust & Competition teams have come together to produce a three-part series that discusses the impact of these developments for our clients. In this first episode, Anatoliy Rozental, a private equity partner in the firm’s Global Corporate Group, is joined by Michelle Mantine, chair of our global Antitrust & Competition team, to talk about recent developments at the intersection of private equity and antitrust law.

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Transcript:

Intro: Hello, welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content through this series please contact our speakers. 

Anatoliy: Hi, everyone and welcome back to Dealmaker Insights. I'm Anatoliy Rozental, private equity and M&A partner based in our New York office uh with the explosion of developments in the US Antitrust space. I've teamed up with our antitrust and competition team to chair a three part series where we'll be discussing the practical impact of recent developments and key priorities for our clients. For our first episode, I honored to be joined by my partner Michelle Mantine, who chairs our global antitrust and competition team and who is at the forefront of some of these antitrust models. So, let's dig right in, we are here to talk about recent developments at the intersection of private equity and antitrust law. What is happening that makes this conversation so important? 

Michelle: Well, this month alone, the federal agencies that enforce the antitrust laws signaled an intensified look into the purported financialization of health care markets. Citing concerns regarding health care consolidation and private equities role in the marketplace. Specifically on March 5th, regulators hosted a public workshop, private capital, public Impact an FTC workshop on private equity and health care. And during that workshop, the agencies announced a cross government inquiry into the impact of private equity investment and other forms of what they refer to as corporate greed in the health care sector. Speakers from the agencies touted enforcers recent enhanced scrutinizing of private equity firms and their involvement in health care. The workshop featured remarks from agency officials as well as panels of economists, academics and health care workers. Now across the board, the speakers denounced private equity’s role in health care leaving little room for discussion of the possible benefits, clinical or otherwise of private capital investments in the health care market. Now that very same day, just before that workshop began, the agencies issued a request for information or RFI looking for information regarding consolidation in health care markets. Again, citing concerns that acquisitions in this space may generate profits for private equity firms at the expense of patient care and worker safety. As the Federal Trade Commission's chair, Lina Khan, expressly noted private equity companies should be on notice of these efforts by the antitrust agencies specifically that the agencies are on the lookout for strategies and things that they see that could be problematic under the antitrust laws. They're focused on, in their words, protecting the American public from anti competitive and unlawful tactics. 

Anatoliy: Certainly worrying for some of my um private equity clients in this space, aside from Lina Khan and the FTC, what other agencies are involved and how are they going to work together to, to regulate private equity firms? 

Michelle: Yeah, beyond Lina Khan and the FTC, the antitrust division of the Department of Justice, the DOJ is really uh sort of alongside the FTC spearheading this effort. Now, both of those agencies, the FTC and DOJ are in charge of enforcing the federal antitrust laws, generally. In this particular effort, those agencies were joined by the Department of Health and Human Services, HHS, with support from the Center for Medicare and Medicaid Services, CMS. HHS is charged with protecting the health of American citizens while CMS works within HHS to administer government funded health care through the Medicare and Medicaid programs. Now, the FTC has undoubtedly focused on private equities involvement in health care. As of late, you know, they instituted a civil suit against a private equity investor, Welsh Carson and its portfolio company US Anesthesia Partners challenging its serial acquisitions with which the FTC alleges allowed the firm to monopolize the market at issue in that case. Now, corporate involvement in health care has been a consistent priority for this administration and it will likely continue well beyond this workshop. The DOJ also has plans to investigate for this discussion on March 5th, whether private equity investments in health care entities violate state corporate practice of medicine. CPOM laws. Now, HHS has a slightly different focus. It plans to focus its efforts more on monetary transparency and accountability regarding the use of government funds. Similarly, CMS plans to implement additional oversight into ownership of healthcare entities by exploring stronger standards to oversee the quality and execution of Medicare and Medicaid programs. Now, these agencies have agreed upon information sharing between and among them allowing information gathered by one agency to be used in potential investigations by the other agencies. Beyond these agencies, state regulators have been taking on similar cases under the state antitrust laws, scrutinizing investing and challenging private equity transactions in this space. In addition to proposing their own state legislation that will make it more challenging for private equity companies to engage in transactions purely in health care, but also beyond state antitrust rules are also becoming increasingly common as a method for inquiring against these types of actions. So for example, the Colorado Attorney General just settled lawsuits against the entity I named earlier Us Anesthesia Partners requiring that group which is private equity backed to sever exclusive contracts with five hospitals and dissolve any of its doctors non-compete agreements. Similarly, the Massachusetts Attorney General imposed conditions on a hospital acquisition by a private equity owned firm within the last few years. Multiple states have implemented transaction notification statutes that are often referred to as baby HSR statutes which are requiring transactions within the health care sector or ones involving hospitals or insurers to report transactions to state authorities before closing it. So it's really critical that, you know, the state players are factored into overall legal risk analysis and evaluation and assessment of transactions. 

Anatoliy: Michelle. We're, we're talking a lot about health care. It does this mean that our PE clients that are not investing in the PE space don't have to be concerned about additional antitrust scrutiny from the government? 

Michelle: It's a great question and I told you the short answer is no. While the examples you are seeing right now are focused on health care, it goes beyond that and the agencies have taken the opportunity to say that in the March 5th discussion and otherwise in their commentary. So just for a few examples, if you look back in August of 2022 the FTC challenged a private equities firms acquisition in the veterinary services space albeit health care adjacent, right? That challenge was settled. But though the parties are subject to numerous limitations on future acquisitions including prior approval and notice requirements on any purchase of their specialty or emergency veterinarian clinics within certain geographic areas. Similarly, alongside of these sort of changes and discussions on private equity and antitrust in June of 2023 the FTC announced upcoming changes to the information that will be required for merger control notifications under the Hart-Scott Rodindo Act. These proposed changes include requiring significantly more information regarding minority investors, officer director, relationships, board advisors, as well as a broader scope of internal documents to be submitted with the HSR filings. Private equity buyers will be particularly impacted by these requests for more information assuming that these proposed rules become final, particularly the information request seeking information about disclosure prior acquisitions that occurred within the past 10 years. That's quite a long time. Now, alongside those proposed HSR changes in July of 2023. The FTC and DOJ had released draft merger guidelines which were finalized in December of 2023. And those guidelines call for heightened scrutiny of private equity activity across all industries not just limited to health care. The guidelines expressly note that the agencies will investigate broad strategies of serial acquisitions even if no single acquisition on its own would substantially lessen competition or tend to create a monopoly. In addition, the guidelines note that the agencies will consider how minority interests may impact competitive decision making suggesting that that might even expand as far as non voting minority interests. Now last but not least in November of 2022, the FTC issued a policy statement describing the types of conduct that it considers to be an unfair method of competition even if that conduct does not violate the traditional antitrust laws such as the Sherman Act and the Clayton Act. The policy statement defines roll up transactions specifically as a series of transactions that tend to bring about harms that the antitrust laws were designed to prevent but individually may not have violated the antitrust laws. Now, since that time, the release of that statement in November of 2022 the FTC has increased its activity issuing civil investigative demands to PE firms under requests per section five of the FTC Act. Last but not least, both the DOJ and FTC have continued to enforce section eight of the Clayton Act which prohibits interlocking directorates between companies that cross certain thresholds, particularly in the case of private equity in August of last year. For example, the FTC announced an action to prevent an interlocking directorate arrangement, marking the first time that the FTC applied section eight enforcement to a non corporate entity. So far because of the DOJ’s recent efforts, 15 interlocking directors have resigned from 11 different corporate boards across various industries. That might not sound a lot, but that's a lot, a lot more than what was prevented in the past. And the antitrust agencies have stated that they are continually looking for interlocking directorates imposed by private equity venture capital and corporate venture capital firms among others. 

Anatoliy: Certainly seems like there's a a new regime here. So, so what can private equity firms do to mitigate their antitrust risk as they do transactions? 

Michelle: Yes, they, this is the time really to take stock of your operations entities in this area should exercise caution and work with their antitrust lawyers to evaluate the effects, both procompetitive and anti competitive of their strategic business decisions. So regular audits compliance efforts, ongoing counseling discussions with Council can really help navigate the impact of new policies and regulations. I think the big thing here is to really make sure that as a, as a private equity firm or corporate client that you're in the know, right? And part of that is appreciating a, we expect that there will be continued scrutiny in this area. Antitrust agencies are focused on private equity and financial sponsors. So we need to just know going into the deal that we may get more questions than we have in the past and be prepared to answer them. And we need to think about that even in the context of minority interests because they're starting to garner much more attention that they had in the past. I mean, the FTC is expected to assess even the minority interest from PE firms and financial advisors in looking at these transactions much more than they did before. Even just looking at how a board member or advisor position might influence the strategic and commercial decision making of an entity. Clients should also anticipate potential enforcement outside of the merger clearance process. Whether it be through a civil investigative demand or other subpoena like document, they should expect that agencies will take a critical view towards series of acquisitions concentrated within any single sector or related sectors over a more expansive multiyear time frame. And last but certainly not least being mindful of the documents you create in your retention policies. You know, there's a tendency by companies to hold on to documents and information longer than they should now is the time to look at those retention policies and to see how long you really need to hold tight on those materials. Similarly, what kind of documents are you creating? And do you need them? Not only do you need them, what do they say and how might they be interpreted by a regulator or completely out of context? Five years later, working with your lawyers to make sure that your language is very careful and strategic to the points you're trying to make is all the more critical really now, more than ever. 

Anatoliy: Michelle. That's all the time we have today. Thank you so much for your time and thank you to everybody for tuning in. For part two I'll be joined by my partner Chris Brennan and we'll be discussing the impact of the new merger guidelines. We hope you can all join us. 

Outro: Dealmaker Insights is a Reed Smith production. Our producer is Ali McCardell. For more information about Reed Smith's corporate and financial industry practices, please email [email protected]. You can find our podcast on Spotify, Apple, Google Stitcher, reedsmith.com and on our social media accounts at Reed Smith LLP on LinkedIn, Facebook and Twitter. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

All rights reserved.

Transcript is auto-generated.

In the first of our Private Equity Spotlight series, Brian Murchie, senior client development advisor at Reed Smith, welcomes Chris Baddon, a principal and the head of business development at Pacific Avenue Capital, to discuss trends in the private equity industry in 2023 and what to look forward to this year.

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Transcript:

Intro: Hello, welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content through this series please contact our speakers. 

Brian: Welcome back to Dealmaker Insights. We are excited with a new series spotlighting the private equity industry. My name is Brian Murchie. I'm the client development advisor at Reed Smith. Excited to welcome our first guest, Chris Badden with Pacific Avenue Capital. I'm personally excited to welcome Chris, given I have a background like his. I spent seven years on the business development team with Platinum Equity. And then from there, I went into a sponsor coverage role with Stifel and then Raymond James. So, you know, welcome Chris, excited to have you and looking forward to your insights here with our podcast. 

Chris: Thanks, Brian. Look, I really appreciate you having us on and, and uh looking forward to the discussion today. Personal background on myself, local kid in Southern California. So I grew up in, in Orange County in Huntington Beach specifically, I found my way to, to USD for college down in San Diego. And uh actually got some private equity experience during a college internship with JMI Equity. They're a software and tech focused private equity firm down in, down in San Diego. And I came up to LA for my first role professionally with Open Gate Capital uh back in 2010, which certainly exposed me to the industry. And I started as a, as an entry level uh business development associate. Most of my coverage was specifically uh industrial focused and chemicals and building products and source a number of platforms for, for the firm. There was there for about 7.5 years, went to Transom Capital for three years and help them build out the business development approach and then came here to Pacific about 2.5 years ago, almost three years ago now uh to lead the business development effort uh for Pacific Avenue. 

Brian: Thanks Chris. So what would you say were your biggest challenges in 2023? And kind of how do you see these evolving in the year ahead? 

Chris: Yeah, it's a really good question and, and maybe um maybe I'll start with just a quick background and an overview on Pacific as a firm that will help kind of segue into how we look at the world and and how we think about opportunity sets within the, the M&A environment and, and you know, just raising our first fund here. So, so Pacific Avenue was founded uh about seven years ago. Now, our founder, Chris Sznewajs um came out of The Gores Group. We have two other partners, uh Jason Lee, who came out of Platinum Equity and Sun Capital and, and James Oh who joined us recently, uh who came out of Transom and worked at uh Gores with uh with Chris. So, you know, we were founded on the premise that a lot of the, you know, firms that we, we all came from, you know, have moved up market uh when, when they look at these corporate divestiture and carve out opportunities and, and there's sort of a, a void or a hole for people with experience and, and credibility and understanding how to navigate these sorts of transactions in, in the lower middle market. So, you know, we were very successful as a pre fund firm. We, we did a number of transactions, you know, four different carve outs here and, and, and a few and one found a roll up opportunity prior to raising our first uh institutional capital pool and we did that successfully last year.

So in, in, in 2023 our, our fund closed officially uh just over 500 million and, and we, we raised the capital to really specialize in, in a few types of transactions. So the first being, corporate divestiture is certainly our, our number one bucket. Um and then businesses with unnatural ownership and, and what that means to us is, is carve outs are, are obviously somewhat self explanatory and, and, and we're buying businesses from, from larger organizations and, and uh fixing them operationally uh to, to end up returning capital to our investors. And we, we specialize in, in a number of categories, but we're, we're generalist um overall from an industry threshold and perspective. So we, we love industrials, um you know, business services, healthcare, consumer tech, broadly defined to name some of the larger sectors. But we're really, we're really more transaction focused than we are subsector experts. So we like deals and, and sit that we think we can be good partners for the Corporates in, in separating these businesses with our, our senior team. We, we've done over uh over 40 carve outs as, as a senior team here. So there are very few things that we haven't seen from transaction dynamic perspectives. And we, when we raise our first fund, we, we have two platforms already closed in the fund. One is a uh chemicals carve out that we bought from TotalEnergies uh that close uh in ’23 and we bought uh an ingredient processor from SunOpta uh as well in the, in the food and beverage space. So, uh we're based in, in Los Angeles. So most of the team sits there. We have a few folks that one sits in, in Dallas and two in Florida. But the, the majority of the team sits out of the L A office and uh we are growing very fast to keep up with uh internal demand and expectations on, on our side. 

Brian: Thanks Chris for that. That's great to hear. And congrats on all the success you guys have had. Uh there, it's been, you know, it's been fun to watch you guys really grow. So, you know, with that being said, you know, what were some bright spots or specific trends that kind of excites you going into this year in 2024? 

Chris: Yeah, absolutely. And, and I'll, I'll, I'll address the challenges question as well. And I know we, we got to that at the end there. But, you know, I think in, in ’23 some of the challenges we face were similar to most funds that are looking to deploy capital is, is navigating a, a difficult financing market to get transactions closed. Um You know, we found that uh timeline to get deals closed was taking much longer than in previous years. And, and we tend to focus in a lot of complex and, and challenged uh corporate carve out situations that have, have a ton of moving pieces and, and they tend to, to take longer than, than they used to. You know, for, for us, you know, one of the challenges we didn't have was, was overall deal flow. You know, the market was, was down certainly across the board. And I think it obviously is relative to the types of transactions, each firm uh is independently looking at from either a sponsor back transaction perspective or um something like us where we spend more time in, in corporate carve outs. But we were actually up just over 30% in, in do year, over year uh compared to ’22. So we had, we had a good, good volume of opportunities on a regular basis. 

Brian: Wow, that's great. 

Chris: Yeah, it was. And I think that, you know, the market shifted, you know, towards us for sure. Uh the complexity in the, in the financing markets obviously kept a lot of, you know, normal regular way, private equity backed transactions on, on the sidelines that, you know, certainly as we'll get to, I think we see an expectation to pick up in ’24. But for us, you know, that led to a lot of complex situations and, and we find that, you know, the carve out market itself, it, it doesn't, it doesn't ebb and flow from a volume perspective as, as much as, as some other categories, but it shifts more from an industry perspective. So, you know, in certain years, we'll see a ton of auto or chemicals or packaging type transactions. And then a year later, we'll see, you know, food and bev and, and oil and gas services and it seems to, to flow more from an industry threshold than it does uh a specific volume or, or ebb and flow based on the the market dynamics. But, you know, we, we think um for ’24 that, that there's a lot of bright spots.

So as mentioned, you know, we raised a new fund. Um so we have plenty of available capital to put into, to new transaction opportunities that we're very excited about. And we're two deals into the fund already. You know, we also have a large co-invest program with our LPs and, and what that allows us to do and when we raise the fund is target, a larger and more sizable transactions and that may be perceived that we can, can complete out out of a $500 million fund. So we punch above our weight, I think from a sourcing perspective and we like deals that are, you know, large and complex from a general thesis and scale is, is really important to us when we look at the, the new set of opportunities that we can go target. Uh you know, how do we, how do we build this? So we, we built this strategically from a sourcing model perspective. So we, we have what we call a dual source coverage model internally Pacific. And what that means to us is we cover the uh corporations directly from a carve out perspective. And also the, you know, all the advisors, the middle market advisors, the bulge brackets and down to the boutique boutique advisors as well. So, you know, in a perfect world. We have uh relationships with one or one or the other party that allow us not to miss a transaction. So, you know, we cover over 2000 public companies. Um We split our business development team up amongst sectors. So we have one individual. Uh Drew Nicoletti who's covering the industrial sphere for us. We another one named Eugene Kim who covers health care, business services, tech and consumer and, and they are regularly reaching out and building relationships um with these corporate heads of M&A, heads of corporate development, the right folks internally that are making these decisions and, and creating these buyers list and, and well, the goal of that, excuse me, the goal of that is to be uh become a trusted partner for these corporate corporations and, and, and understand with credibility that we have to navigate these sorts of complex transactions and, and ultimately, you know, we are introduced to the, the advisors that they choose. And so it, it's, it allows us to have either uh one sided coverage or dual sided coverage. In perfect world you know, we, we talk to a large corporation and they're gonna choose Goldman Sachs as their advisor, for example. And you know, we, we are covered on the golden side and we are covered on the corporate side and uh in, in a less perfect world we're covered on one of them and we don't miss the opportunity set either way. 

Brian: Chris, with that being said, with, with, you know, your firm's experience in corporate uh divestitures and, you know, your, your area focused on that part. How do you view the corporate divestiture, you know, market coming for this year? 

Chris: Yeah, I think we expect it to be pretty strong, you know, we from the conversations we have, you know, I think there's a lot of activity that we expect to see uh from both both the advisory network and specifically from, from the Corporates and in thinking about strategic alternatives. So I think we expect it to be pretty strong, you know, we also expect that the private equity back assets in the market will, will increase dramatically right there, there were, there was a pretty big slowdown in that piece of, of the M&A uh cycle last year and going forward, we expect that that is going to be a big wave of opportunities. You know, we talked to all the advisers and most of them have extremely strong backlogs uh and are just waiting to hit go frankly for the right market conditions for new sets of opportunities. Uh And, and I think the third, the third way is we look at transactions is is unnatural ownership. So, you know, in, in that very much fits in, in a corporate situation where there's a non core nonstrategic business unit that is being carved out for, for a variety of reasons. But it also fits into, um, a founder own business that is in transition and, and maybe there's no succession plan uh in that organization. And they, they look for uh a private equity partner that can help, uh, take them to the next level. Maybe they haven't had any institutional capital invested in the business before it, it could be a, private equity backed business that sits in a, in a prior fund or maybe even two or three funds ago. And, and there's sort of a need to move on from the asset. I think we'll see a little bit of that in ’24 with, with the fundraising dynamics of, of LPs obviously looking to get to get capital returned. I think uh sponsors will, will certainly need to sell businesses that they may have held on to longer uh in, in normal, normal course. But, you know, maybe they are looking at a new fundraise and they need to return capital um to do so. So I think we'll see more of those kind of must be sold, dynamic transactions and then there's, there's other situations where uh the lenders may have taken over the business and it may not be a broken business per se, but it's certainly one that has operational complexity and an unnatural current owner. So we, we look at those as well and I think that's a bigger piece of what we'll see in ’24 but we, we generally expect the market to be pretty active for, for Pacific Avenue. 

Brian: Thanks. That's excellent background on, on that. And you, you touched on a little bit of this Chris, but could you just kind of give a overview of the market with what you saw in 2023 and kind of what your challenges were and kinda, you know, even those challenges, how you were able to also find opportunities in 2023? 

Chris: Yeah, of course, you know, I think for, for, for us 2023 was a, was a good year. Um You know, we raised our debut fund, which is, is a big accomplishment. It's tough financing environment uh has been, you know, publicly documented. It's challenging to get that over the finish line. So we were able to have very good success with that, which is, is a testament to, to the team here. You know, I think from a, from a new platform perspective, you know, we completed one new platform which was a cross border divestiture of a very complex carve out from TotalEnergies. Uh There's three different product lines basically where we had to insert some, some management as part of the transaction and it was, it was extremely complicated. So getting that one over the finish line is, is a good testament to our team and our ability to, to succeed and, and actually transact in in those types of situations. For where we see opportunities and we were able to find them, you know, I, I touched on it a little bit but our, our model is, is dual, dual covered. But, you know, I think we, we inherit, we specifically spend a lot of time with the, the larger uh bolt bracket advisors and, and, and what we find and it's a fair question to say, you know, we are a $500 million fund. How much overlap is there with the, you know, the Goldman Sachs and the JP Morgan of the world. Uh You know, I think that there's quite a bit actually and, and what we find is, you know, those those advisors will, will regularly take on these, you know, larger revenue scale but more complicated corporate divestiture and carve out transactions. And, you know, that allows for an interesting um deal dynamic for a firm like us because generally they're, they're probably smaller processes than some and you know, that they are looking for a buyer who has credibility and can navigate a carve out and, and has proven the track record of doing so. So, you know, we spend a lot of time building relationships with, with the industry advisor, specifically industry coverage uh along with sponsor coverage at these larger banks because, you know, they tend to be smaller processes and, and knowing them personally um across the sectors that we like to play and allows us to get access to some of those opportunities that may be harder to navigate in, in other form. And I think that that's also true of, of the carve out uh and corporate relationship directly. We find that we get unique access to smaller, more bespoke deal processes. Uh Or maybe it's a, it's a boutique advisor that uh spun out of a big bank and, and they have a relationship so that they, they win that mandate. So we, we find a lot of success in that model. And as as mentioned, we were, you know, up just over 30% on deal for a year, over year. So we, we navigated the, the, the markets in ’23 fairly well from, from a sourcing model, but it's, it's still tough and, and look, we, we have a long way to go from a sourcing perspective, but we, we're starting to make headway in the relationships on, on both fronts. 

Brian: That's great to hear, you know, with that being said, I know a lot of these, the investment banks uh have this backlog that almost goes back to last September of 2023. But you know, what are your expectations in this year for 2024? And do you think that there'll be an uptick in deal activity this year? 

Chris: We, we do. And, and I agree, we, we hear that as well that the, the backlogs are extremely strong and that these, these things will come to market. Uh You know, I think we expected January to be a little busier than we found it to be in 2024. You know, I think there's a few of the big conferences and events early in the year that, you know, you have ICR and JP Morgan Health and, and, and Holiday as well. So, you know, we figured the back half of January was when the, the inboxes would start to flood with new opportunities and, and we've definitely seen our fair share, but I don't think we've seen that big wave that I think we expect to uh coming into the New Year. So my guess is it'll be pushed later into, uh you know, February and March and, but we, we feel there's going to be a strong activity level for, for M&A and deal flow overall in, in ’24. Uh And we, we think a lot of that will be driven by private equity backed assets, as mentioned earlier on, you know, sort of the need to sell, um need to return capital and need to raise capital. So I think we'll, we'll get a lot of those opportunities and, and that's fine for us because they can fit in that unnatural ownership bucket as, as we talked about. But I think we'll continue to see uh a heavy load of, of both sets of opportunities in ’24. 

Brian: And when this activity picks up this year, what sectors do you think will be busier than others in, in this coming year? 

Chris: Yeah, it's a great question, Brian. I it's difficult to say from a, a carve out perspective, you know, where to predict activity. You know, you can look at which sectors may be more challenged that may create carve out opportunities for Corporates to clean up um or reorganize their, their, their portfolio. Uh But I think the way we look at it is when we, when we circle back on, on ’23 and we look at where our our sourcing activity came from. You know, we have a few sectors of, of focus going into ’24 that we're excited to spend more time in. So industrial is, is a very big sector for, for us at Pacific, you know, represented nearly 50% of all deal flow that we we sourced last year. So I think there are, you know, a few sectors, health care, business services and, and broadly tech are our focus areas for us in addition to consumers. So we, we brought on a new partner, he joined us uh a few months back and his name is James Oh and he has a, a big consumer background from, from his prior firm. So, you know, we, we are gonna spend more and more time there than, than we did previously. And we're looking at several opportunities now that we're, we're fairly advanced on in that universe. So it, it's difficult to say exactly where it will come from. But I think our, our aim is to really focus in, in those sectors in addition to the industrial world uh to make sure we're, we're rounding out our, our, our level set of opportunity. 

Brian: Yeah, you know, that makes sense. And you know, with the cost of capital, you know, are, are funds kind of resetting their investment uh strategies just given like the volume of M&A deal flow being down, you know, the last couple years? 

Chris: So we, we are not, you know, it's been a tough environment, you know, as we, we started this off with the financing markets have created challenges to get transactions complete. You know, I think we, we certainly haven't reset our strategy. You know, we like businesses in transition and, and complex situations that we spend time on. But I think what it, what it does is it changes, you know, sort of valuation perspectives specifically in more cyclical and or challenging industries. So, you know, things that you, you may have looked at one way um are, are either more expensive or uh more uncertain in terms of navigating how you're gonna uh get that deal over the finish line from a financing and overall valuation perspective. So, you know, look, it's a really competitive market where we play and similar to most, we are, we're constantly adjusting, you know, our approach to, to find ways to, to win transactions. You know, one of the things we, we spent a lot of time recently doing is is linking up with uh buys site advisors in specific sectors that we may not have as much uh specific expertise. So, you know, we are at Pacific are, are, are really aiming to build the firm as um you know, a mutual partner to obviously the the companies we're buying, but also the advisors that we work with to uh to acquire businesses and and regularly engaging them on the buy side. So that when we look at a new asset that we may understand the carve out dynamics um expertly, well, you know, we may not understand the subsector uh dynamics as well. So we, we look to lean on them and, and partner with them and, and bring them alongside as an engaged uh advisor. And then we're also spending a lot of time building out and operating partner network and really leaning on those folks as well that we can uh tap in for, you know, potential CEO roles or, or board seats. But really help us navigate, you know, the, the market dynamics of a specific niche industry that, you know, we may not be as familiar with outside the, the, the carve out and the transaction dynamics. So, you know, we think overall that ’24 it's gonna be a pretty transformational year for Pacific and, and we're working on a number of transactions now that we're very close to getting announced. So we're hopeful that uh those will all come to fruition. 

Brian: That's exciting. Congrats. 

Chris: Yeah, thank you very much. Now, we're, we're, we built a really good team and we're continuing to invest in, in the team here at Pacific to grow and, and, and make sure we don't have any bandwidth concerns from an execution perspective. So, you know, we've really executed well on that, on that. And um you know, we're, we're continuing to look for folks that, you know, fit, fit the Pacific Avenue culture and, you know, want to be a part of a kind of a growing winning team. 

Brian: And I know, you know, last year, there was kind of a gap between valuation expectations I mean, are you seeing valuations, have they reset? I'm just curious how you're seeing that. 

Chris: Yeah, I think they've certainly reset from, you know, 18, 24 months ago. You know, I think the bigger challenge that we saw in, in ’23 was, you know, just the financing markets and, and, you know, what, and, and sustainability of EDITDA, right? I think that's the other point as businesses had had rebounded on the backside of COVID, obviously that was, you know, a number of years ago now, but as businesses have continued to perform, you know, some have have changed completely, some, you know, declined and, and some, it's really understanding, you know, what current sustainability of EBITDA looks like and, and how to navigate that for, for a go forward transaction. 

Brian: You know, in, given the market that we're in, are you guys changing your target returns? I mean, I've talked to a number of sponsors where, and they told me kind of like the first time they're modeling in and they're forecasting lower returns just to provide some liquidity back to their LP. So I was just curious how, how you're viewing, you know, this current environment and if you're, if you're changing your target returns. 

Chris: You know, we certainly haven't. Um You know, we're a young fund in, in, in our uh in our cycle right now, you know, we raised it last year, it closed. So, you know, we're pretty focused on, on the strategy that we have that, that we raised the capital with and, and, and looking at these carve outs and, and divestitures and unlocking value as part of our operational thesis. So we, we certainly haven't, but obviously, we're, we're a different place than some, you know, we're, we're a new fund and, and, and recently raised. So can, can understand, you know, if we weren't that, that could be the case, but for us, we, we certainly haven't. 

Brian: Thanks. That's, that's great to hear. Well, Chris, that's all the questions that I had. And thank you so much for our podcast with Dealmaker Insights. We wish you and Pacific Avenue all the success in 2024. And thanks again for your time here. 

Chris: Yeah. Thank you very much, Brian. Appreciate you having having me on and, and it was great to, to discuss with you and share a little bit about Pacific and, and how we see the world and, and we look forward to 2024 with you guys. 

Outro: Dealmaker Insights is a Reed Smith production. Our producer is Ali McCardell. For more information about Reed Smith's corporate and financial industry practices please email [email protected]. You can find our podcast on Spotify, Apple, Google, Stitcher, reedsmith.com and on our social media accounts at Reed Smith LLP on LinkedIn, Facebook and Twitter. 

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