Value Investing Forum 2022: Maximizing Value for Stakeholders | McDermott Will & Emery

During this session, Stephanie McCann, Partner and Co-Head of McDermott’s Finance Practice Group, and Frank Steinherr, Partner and Co-Head of McDermott’s Private Equity Practice Group, moderated a discussion that explored value creation strategies for equity and debt investors. Session panelists included:

  • Alex GreleyPartner, Linden Capital Partners
  • Ilya KoffmanManaging Partner, Turnspire Capital Partners
  • Dan LeePartner, Comvest Partners
  • Seth PearsonManaging Director, Private Equity, York Capital Management

Below are the main takeaways from the discussion:

  1. During a discussion of the impact of rising interest rates, inflation and geopolitical uncertainty affecting today’s market for “sellers” in mergers and acquisitions, Seth said that the terms not economics could shift to buyers; however, he said he also expects price and EBITDA multiples to remain seller-friendly given the unprecedented amount of capital competing for a finite number of potential deals. Dan agreed with Seth’s view and said he was surprised the markets hadn’t corrected more yet. Dan added that he expects recessionary concerns to be incorporated into the underwriting process for new financing in the future to ensure that new credit can withstand a possible recession.
  2. Seth said sponsors need to bring subject matter expertise to drive value creation in today’s competitive marketplace. He said such expertise is often provided by the connections and relationships a sponsor can provide with industry experts and operational advisors to drive improvements around margins and increase the efficiency of existing operations.
  3. During a discussion on whether lender co-investment helps align the interests of sponsors and lenders in terms of maximizing value, Dan said he does not believe such co-investment investments make a significant difference, because the low return on equity co-investment in relation to the size of the institution is not enough to cause lenders to change their minds about a particular company. According to Dan, maximizing value is a byproduct of transparency between sponsors and lenders regarding the health of a particular business. Dan added that the market is moving towards transparency and moving away from the old school view that lenders should only receive the information they are contractually obligated to receive. Both Ilya and Seth agreed that transparency is essential in today’s market, and they noted that transparency should also extend to the lender in their confidence in a business so that a sponsor can accurately assess the situation. Alex discussed the role that junior capital providers can play in helping drive value creation through the alignment of sponsor and lender interests through products such as Preferred Stock and Holdco PIK Notes. Alex added that junior capital can provide buyers with a round or more of additional leverage when competing to buy assets at high valuations.
  4. Ilya said he expects big companies to shed underperforming segments of current deals if the current market downturn continues, and he identified carve-out deals as a place where buyers can stimulate value creation. According to him, sponsors who can identify the root causes of underperforming companies will have the opportunity to earn high returns on carve-outs.

[View source.]

Melvin B. Baillie