Private Capital Call

Financing companies in a COVID environment is as challenging as buying and selling them. Top M&A bankers gave us their list of do’s and don’ts.   

“There are a lot of twists and turns today,” a mid-West MD told us. “You may think the company you’re trying to sell is operating at pre-COVID levels, but what happens if this virus stuff backs up?  

“In the current climate you don’t want to run a big process. Having dozens of lenders see softer monthly numbers is not a path to success.”  

Another source agreed. “You don’t want to have all the lenders talking to each other. It’s best to keep it to a tight circle. We’re seeing situations where only existing lenders are being asked for term sheets.”...

As deal makers have adjusted to the new normal of business openings (and re-closings) across the country, conversations are now back to M&A processes.  

How has the pandemic affected deal timelines? “The time to market will inevitably elongate,” one top middle market banker told us. “Buyers and sellers will need more preparation to assess the impact of COVID. What’s unknown is whether the ramp-up in cases in the US will stall the market.”  

What kind of constraints are drags to M&A? “Travel restrictions are the most obvious,” another banker said. “Quarantines limit the ability of management teams to build rapport with buyers, and to manage due diligence.” 

“What’s particularly challenging now is the differing COVID status by state. Also conflicting state-by-state restrictions can put deal principals at risk.”

This week we kick off a new series on COVID-impacted deal flow, with a look “upriver.” How has M&A activity been affected, and what should deal makers expect for the “new normal?” We interviewed top middle market investment banks about their experiences so far in this coronavirus season.   

The beginning of the crisis caught advisory firms (and the rest of us) flat-footed. “Of the deals we had in the shop when the music stopped in early March, roughly 80% were put on hold,” one partner told us.  

Another sell-side MD agreed. “Things came to a screeching halt,” he said. “We adjusted our expectations down to 20% of normal in the early days. It’s climbed back up, and we’re seeing a good amount of activity, but it’s still half of what it was. The flow has gone from about two or three deals a week, to one or two...

As part of our special healthcare series we spoke with the partner of a NY-based private equity firm. He has two decades of experience investing in healthcare businesses.   

We asked how the current crisis unfolded for your firm?  

“For the first couple weeks it was 100% focus on the portfolio,” he told us. “Turned out it’s been pretty resilient, so we could turn our attention to new opportunities.   

“Our team has all invested through the Great Recession. We know these are the moments when, if you didn’t invest, you’d wish you had.”   

Were some sectors affected more than others? “...

Two years ago, we issued a special report on healthcare trends. We recently revisited one of our sources, a top healthcare investor.   

“Everyone’s an infectious disease expert now,” he told us in an interview. “We need to change the way we look at infection. There are about 40,000 deaths annually from the seasonal flu. It affects infants and the elderly.  

“Corona diseases have mutated. Real treatment is driven at the federal level. Like seat belts. With COVID-19 you need everyone to get vaccinated.”  

How has government managed so far during this crisis? “The CDC made some early mistakes on testing. As with 9/11 certain people knew early on about the virus. But they didn’t coordinate with other agencies...

We continue our special healthcare series with the heart of the matter: the doctor/patient relationship.  

We asked our primary physician in a Zoom interview about his experience.  

“Thank goodness for telemedicine,” he told us. “I can be very effective and have meaningful discussions with my patients. A lot of these now involve testing for the virus antibodies, which is easy and quick.”  

How will this pandemic change patient behavior? “Patients are acutely aware now of how these viruses spread,” he said, “and how to protect themselves from infection...

Healthcare has been ground zero for the worst pandemic of the modern era. How the industry has reacted and how credit and equity providers are dealing with this new world order, is the subject of our new special series.  

“Physician practice management companies were the first and worst hit,” one banker reported. “Procedure volume dropped precipitously with COVID. One anesthesia practice that serves surgery centers and hospitals saw Ebitda go from $100 million to zero.  

“Most of these orthopedic, cardio, and GI procedures were elective. It’s a great franchise, he said. They haven’t lost a single doc. Procedures now appear to be rebounding. EBITDA has only begun to lift, but lenders believe a recovery is inevitable.”  

Interestingly the business was purchased in the teeth of COVID. So the sponsor was able to buy it on the cheap. As ugly as things look right now, investors are taking the long view. So lenders are willing to stand behind them.”...

“Time to go to cash,” we announced recently at the dinner table. The Dow had almost climbed back to its February 12 peak. “What does that mean?” our six-year old daughter asked. Her mother replied, “It means Daddy wants to put our money in a mattress.”  

Unfortunately more pressing matters – like whether to give our ten-year old a cell phone (we did) – intervened, and the moment was lost.  

Being held hostage to headlines is how liquid assets behave. You can ride the wave up on good news, but bad news sends the roller coaster right back down. Even credit assets can be hijacked by fund flows and Fed moves....

In our just-completed series on high-yield bonds, we concluded that issuer and investor activity has largely been driven by technical factors: near-zero interest rates, the Fed’s support of fallen angels, and skewed-to-worse ratings for leveraged loans.  

How then should investors be thinking about the illiquid market?  

Private credit has a different profile than tradable assets. It provides investors with steady income (and issuers with long-term credit solutions), regardless of market volatility.   

As our Chart of the Week shows, middle market loans sport higher yields over time than other asset classes...

What’s been described as “massive” new issuance in the high-yield market led to the most deal volume for May ($48 billion) since 2003, according LevFin Insight’s Matt Fuller.  

As our Chart of the Week depicts, cash inflows to bond funds totaled over $35 billion in the past nine weeks. That includes the top three weekly inflow numbers ever recorded.  

By contrast, retail loan funds saw out-flows of $18 billion in March and April alone. What’s behind these contrasting dynamics?