By: Dexter Braff
Will a Stay Calm and Carry-on Mindset Beat Back Stubborn COVID Headwinds?
Good question.
Glad we asked it.
No doubt this is a fluid situation. In fact, given what has transpired in just the past week, our answer today could very well go back to the future in 30 days or so (more on that below).
But right now?
There is evidence – mostly anecdotal at this point – that the M&A world is beginning to awaken from the Big Sleep.
With the second quarter just ending, transaction data has not yet been aggregated and reported. But if you are a regular recipient of PitchBook’s daily round-up of all things private equity and venture capital related, it’s plain to see that the number of announcements of completed transactions has gone from “few and far between” to “Surprise, deals are actually getting done.”
We’re seeing much the same in our own practice, with two closings in the past 30 days and another three set for the next 30.
Moreover, and perhaps most telling of all, those deals are largely being structured without contingent payments despite market instability due to the pandemic.
And access to debt?
Some sponsors are bypassing the middleman and funding deals with all equity (with the intention of recapitalizing at a later date).
So, what gives?
There are certainly sectors that are either benefitting from life in the time of COVID or have experienced little interruption, beckoning buyers back to the bargaining table. In health care services, there’s telehealth, remote monitoring, substance use disorder, mental health, group homes, specialty pharma, home medical equipment, infusion therapy, and health care staffing, to name a few. (For further details, see The Braff Report, M&A in the Time of COVID: Sectors that are Likely to Fare Better than Others.)
And then there are the “opportunistic” transactions peppering the market (banker-speak for distressed companies that can be acquired at substantial discounts).
But our Spidey-sense is that it’s more than that.
For one thing: Private equity’s gotta do what private equity does. And that is deploy capital. The industry already went into 2020 with substantial dry powder that needs to be deployed. Moreover, a lost year can be tough on fund performance.
And then there’s the COVID infused political-economic-social debate. While we are not taking a position on this difficult calculus, with large swaths of the country and its citizens adopting an Alfred E. Neuman (what, me worry?) or Evil Knievel (it’s worth the risk) position, our sense is that a kind-of-sort-of facsimile of business as, not quite, but close enough, to usual has begun to permeate Wall Street’s collective mindset.
And whether it’s true, or not, or sustainable, or not, or appropriate, or not, it has changed buyers’ mindsets from “no way” to “we know there’s a way.”
But we also realize that this mindset is extremely fragile. And with new documented cases of coronavirus setting consecutive records for nearly a week as of this writing, we may see buyers once again scurry for cover.
Perhaps.
But a complete M&A meltdown that seemed very much in the offing just two to three months ago?
The market may be down.
But it definitely is not out.