As of this writing, we mark the two-year mark of the COVID-19 pandemic. When studying the impact on the Private Equity markets, its our opinion that the pandemic did little to slow down the industry’s momentum in 2021. As a result of the various monetary actions taken by the Fed during the pandemic, both private and public markets benefited from the dollars pumped into the global economy.
The Wait Was Over
At RKCA, we know firsthand the benefit of these policies. As a reminder, with our merchant bank structure, RKCA has both an M&A Advisory and a Direct Investment (Private Equity) practice. The Direct Investment Practice, which syndicates capital deal-by-deal, has a portfolio today made up of nine different companies in various stages and various states in and around the Great Cincinnati area. For RKCA, the burst of liquidity during the pandemic helped shore up the portfolio companies with liquidity to wrestle the erratic demands and supply chain issues during the pandemic. For private equity firms, with unspent capital on the sidelines and the deluge of monetary policy, ideal conditions were in play in 2021 to both buy and sell portfolio companies. After nights spent scrolling Netflix only to re-watch Seinfeld, when Squid Games came out, you got little sleep for a few days and had a lot of Zoom conversations with friends and colleagues.
According to a study by Bain & Company1, the raw number of transactions in 2021 hovered around the five-year average and lagged those in 2019. This should not be interpreted as a lack of dry powder now as we head into 2022. “After 10 years of steady growth, dry powder set yet another record in 2021, rising to $3.4 trillion globally,” according to Hugh MacArthur at Bain.
How does this affect me
You may be thinking, “okay great, lots of deals got done, a lot of cash was spent, a lot of cash is still out there, but so what. I own a business that didn’t transact.” It’s my opinion that first, you need to confirm if you even want to transact and when. If you need help in that decision, email our Build To Sale Practice (BuildToSale@rkca.com) and we’ll send you a complimentary Build To Sale alignment tool to help you and any other owners in your company orient on an outcome’s timing, value, structure.
We are increasingly being asked by sellers how “hot” this market will remain with deal volume and multiples where they are. While we have the opinion that this euphoria will continue for some time, there’s no reliable answer, especially in this current macroeconomic environment. We have seen cycles like this in the past and will continue to see them. This is not to say, rush to an exit in 2022 OR ELSE, but rather, control those things in your business you can.
We wrote last month about the Intangibles in your business and how to protect and develop them. For a copy of our Intangibles Matrix, please let me know.
What Will 2022 Hold
Only time will tell. As of this writing, we are seeing slowing COVID-19 cases at the two-year mark of the pandemic, along with inflation at a level the US and other markets haven’t seen in 40 years. Russia’s invasion of Ukraine is in week 3 as I write this, and beyond the tragic loss of human life and suffering, the invasion has caused further uncertainty globally around energy prices, supply chain and other factors.
As a business owner navigating this environment, particularly regarding inflation, here are some helpful strategies to consider:
- Get surgical on pricing. Whether you are a software company or a durable goods business, review all the costs that go into your business and adjust pricing on customer segment (or more surgically by customer) if needed. Just as those inputs to your business have inflationary exposure (cost of goods, salaries, rent, etc), you also have customer exposures that may limit your company’s ability to retain revenue as customers may become acquired, merged in, or exited from your CRM in the coming year(s). NOTE: It’s my opinion that if you don’t have a CRM, that is table stakes. Comparing an Excel-based list of customer information vs. a true CRM system (like Hubspot or Salesforce) is like comparing doorknobs to apples. It’s my opinion that an acquirer will note this as a risk; and, a true CRM creates the opportunity for efficiency and documentation for your business that Excel cannot provide.
- Play some practice rounds of chess. Although the game is a good way to flex your mental muscles, I’m referring to playing practice chess regarding your business. There are a number of scenarios you should consider running out against your business in the coming year. To really exercise your chess moves in this environment, engage your Board (put one in place if you don’t have one) and your banker (consider hiring one if you haven’t already) and spend a half day running out various strategic scenarios that impact your business. We often find that Board meetings and discussions go through a checklist of items (P&L for prior month, YTD revenue, team health, etc.) and don’t dedicate enough time to game-theory planning. For example, “if inflation is 2x over what we are reading it is (7.9%) due to oil price increases and continued impact on supply chain, what does that mean for my business in the next 6-12 months?”
- Think through your timing. Maybe now isn’t the right time to exit. That is okay. Maybe it is, that’s also okay too. But pick your favorite analogy here for preparing (running a race, getting ready for a trip, prepping to sell your house) and know that a hurry-up-and-go scenario is never the best. Take the time to retreat away, think through with your Board/spouse/other owners/banker/clairvoyant/dog/cat/etc. what you want the outcome to be and when.
This article focused on PE transactions and volume, but a buyer for your business could be a PE firm, a family office, a strategic, a search fund, and more. At RKCA, our Mission is “A Life’s Work, Realized”™ and we specialize in all types of transactions and buyers. To learn more, email me.
- Bain Capital, Global Private Equity Report, 2022.
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