Outlook for Private Equity Dealmaking: Gulf Coast Trends

Hi Jason, thank you so much for being with me today.

Jason MacMoran:

Oh, very welcome. Thanks for having me, Elana.

EMS:

Absolutely. So to kick off the conversation, tell us a little about the firm's Gulf Coast office, your client base, and the types of services your group provides to your clients.

JM:

Happy to. So I'm based in our Baton Rouge, Louisiana office, but serve clients all over the Gulf Coast, predominantly in what I'll call the industrial and energy corridors along I-10 and the Mississippi River. Client base is again going to follow that same type of industry, so heavy industrial and the service companies that support them. Again, energy focus, oil and gas focus, but also a fair amount of healthcare and professional service work as well.

EMS:

Great. Thanks for that high level overview, Jason. So clearly it's an interesting time right now with respect to deal making with deals taking longer to complete, and love to hear your outlook for M and A activity for the end of this year going into early next.

JM:

Sure. I think it is a challenging time. We've seen some slowdown in both the volume of transactions and I think buyers are being a bit more careful in the work they're doing to making sure that as capital and the cost of capital gets a little bit tighter, that they're dotting all their I's and crossing all their T's. Don't expect that to change much into the next year with the interest rate environment. But we are seeing still opportunities out there for buyers in certain spaces, in particular in some of the energy infrastructure spaces. We have seen good activity there. And in the healthcare space we are continuing to see some consolidation as private equity gets deeper into the healthcare markets and as not-for-profit systems start to expand and look for other opportunities to increase their profit.

EMS:

Great. Jason, and as a follow-up, I know you briefly touched on this in an earlier question, love to hear some trends you're seeing in the Gulf Coast with respect to deal making, especially among some of the industries and sectors you previously mentioned.

JM:

Yeah, it is an interesting time as the economy is looking at a transition away from some of the traditional energy sources, so oil and gas into the clean energy. You are starting to see some of that drive a little bit into this area, but there's still a very predominant focus on traditional, we'll call, energy production. What we're seeing a lot of is expansion in some of these facilities around the Gulf Coast area and service providers that service these facilities are attractive and we've seen a fair amount of activity around that.

EMS:

Great. So Jason, I know you briefly alluded to this, the current macroeconomic environment has clearly presented some challenges to deals closing. Love to hear which macro factors have had the most impact on your clients who've recently closed or in the process of closing an M and A transaction?

JM:

Yeah, the big story I think that everybody's aware of is the interest rate and inflationary environment, and you'll see that manifest in different ways in different industries. Interest rates of course are changing the cost of capital for a lot of market participants, but inflation is going to affect different industries differently. We've seen instances where there's been sort of a delay as input costs have increased, where client pricing may not have been able to keep up and there may be a lag in profitability. And there are some industries, healthcare in particular, where costs like labor supplies have increased at market rates, but because of the nature of maybe reimbursement rates, they aren't able to increase revenues and you're seeing margin compression that's really difficult to avoid.

EMS:

Jason, as a follow-up, what about valuations? How has the macroeconomic climate impacted those?

JM:

I think it gets back to the cost of capital concept that I mentioned earlier as interest rates have increased. We've seen changes in the cost of capital that have been less favorable for valuations, and we are starting to see that impact pricing. As with all things, I do think there are still opportunities and good valuations to be had, but we are seeing the higher valuation deals take more time and more effort to make sure that they are getting what they pay for on the buy-side, and that there has been more restraint on multiple expansion and pricing.

EMS:

Jason, I'd love to discuss the due diligence process as well and wanted to hear your thoughts on some of the top few accounting diligence issues that you encounter in your financial due diligence work.

JM:

It's largely been on the profit side, quality of revenues and the revenue stream, is it going to be durable into a recession or a down market? And then ability to raise prices. If input costs are going up, has the target's customer base or client base been able to absorb some of that with price increases? The other side of that on the expense side of the P and L is are prices continuing to increase and input costs continuing to increase, or has the target been able to contain some of that through either rationalization of costs or efficiencies from other areas?

EMS:

And what about from a tax and, or IT perspective? Any thoughts on that?

JM:

On the tax side, we have seen more transactions focused on what I'll call the excise taxes, recently dealing with this. Making sure that their buyers are not stepping into any unexpected liabilities across state lines and not absorbing any business taxes that maybe a seller was not sophisticated and did not properly account for. So we have seen some of that accelerate. On the IT side, again, I think as buyers are seeing costs go up in target companies, there is more of an interest in how much of that cost could be leveraged through IT and what that may look like and what type of IT investment may be required going forward, because that may impact valuation as well.

EMS:

Great. So Jason, to shift gears a little bit, love to hear one piece of advice you would give to a company contemplating both a buy-side transaction and a sell-side transaction.

JM:

I think the best advice I could give probably boils down on both sides to patience. On the buy-sides, be patient in looking at targets and trying to find a target that fits the investment criteria. On the sell-side, it's similar, it's transactions, but for a different reason. Transaction processes take time and very often sellers can get a little deal fatigue and if you've got a quality business and you run it well just expect that buyers are going to be thorough in their process and be patient going through it. The other piece of advice I think is to be prepared in advance. It's hard to have a business be ready for sale immediately, and we often advise clients when they're considering a transition, start planning now. Get your basics in order and get your house in order to go ahead and have as much work done as you can before that process really begins and that usually pays off in spades.

EMS:

Jason, we've covered a lot of ground today and wanted to see if there are any final thoughts you would like to share with us?

JM:

I think back on what I said a moment ago is planning early is always good advice for any company or family business that is looking to sell. Get your advisors in order. This is the type of event that most sellers will only do once in their life or their career, and this is the time to be as thorough as possible with your advisor group and making the right decisions to ensure a successful outcome.

EMS:

Jason, I want to thank you so much for sharing your perspective with our listeners. And thank you for listening to the EisenAmper podcast series. Visit eisenamper.com for more information on this and a list of other topics, and join us for our next EisenAmper podcast when we get down to business.

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