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End of The Liquidity Party–Now What?

With inexpensive leverage a thing of the past in an era of higher interest rates, likely for a long stretch of quarters to come, industry members confront a slowdown. Here’s what it means for private equity.



Tepid merger and acquisition activity in the latter half of 2022 was further muted by an accompanying downturn in public equity market valuations.

Nevertheless, private equity dealmakers doggedly continue to transact. Grueling bear market conditions summon enterprising and creative ideas. The environment requires fortitude, patience and risk — doing deals no one else will.

In early February, Trinity Investments and Credit Suisse Asset Management agreed to purchase the Diplomat Beach Resort in Hollywood, Fla. from Brookfield for an undisclosed sum, but reportedly in the neighborhood of $840 million.

It’s a bold purchase considering a hotel transaction that large hasn’t happened since the start of the pandemic.

Sean Hehir, Trinity’s president and CEO, discussing the private markets generally, explains that, regardless of conditions, “large PE firms come to us asking, ‘where are the nuggets of gold?’”

The South Florida real estate market is one place to look. Deep within large conglomerates is another.

Turnaround firm OpenGate, which has $1 billion in assets under management, is on the prowl for middle-market corporate carve-outs – non-core assets no longer fitting into strategic plans – as well as some select situational opportunities, among other categories.

Terms of Endearment

Custom-crafted closing terms are going to rise to the fore in a post-bonanza sobering-up period, agrees Josh Adams, a partner at OpenGate, a firm which famously bought TV Guide for $1 in 2008 (then restored it to health and sold it inside of seven years).

“It’s an interesting market where we will see more ‘structured deals,’ including seller notes and earnouts, to help bridge the gap on value, and to help meet sellers expectations,” Adams says.

It’s true that a large number of acquisition targets are controlled by founders and board members, reticent to pull the trigger, convinced that a stock market rebound is just around the corner, numerous PE industry members said.

Creative structures certainly come into play in such cases, to get deals across the finish line, explains Robert Belke, managing partner, Lovell Minnick Partners.

“Earn outs could be on the table to help bridge the gap between buyer and seller expectations,” Belke says.

Sellers are often focused on the price they could have gotten in a better market a year ago, so offering to pay that price in the event the company performs in the future is a great tool to use, he explains.

“Another structure we are seeing is the use of preferred equity being granted to buyers in lieu of common stock,” Belke says.”Buyers are willing to pay a higher price for a senior security, which also helps close the gap.”

Diamonds in the Rough

Several PE executives looking ahead to the next 12 months say they are confident that their expertise looking off the beaten path for viable targets is what will carry the day whether the post-tightening cycle ends in a soft landing or something more akin to a hard one.

“Investors are looking for smart money,” says Morty Singer, a managing partner at New York-based Traub Capital Partners which takes a “return on culture” approach to investing in lower middle-market private companies with potential but just need fresh energy.

“We don’t look for shiny objects,” Singer says of Traub Capital’s soon-to-be-finalized debt and equity stake in a family-owned food industry company based in the U.S. but with ties to Europe.

“We look for an opportunity where others cannot or will not,” Singer explains, emphasizing one of the sweeteners used to get the seller-family comfortable as the deal came together, before marching down the aisle.

“For the mezzanine finance piece, we found a leading mezzanine finance company in the country where this family business has its roots, adding a key partner and just another layer of comfort.”

For private company owners who have navigated through a traumatic period with Covid – and now with a recession looming – there’s heightened awareness about preparing for whatever’s around the bend.

“Entrepreneurs are now more than ever keen to partner with an engaged and added value partner to future proof their organizations,” Singer explains. “Not just financially but organizationally as well.”

Trinity, a real estate investment, asset management and development firm with $4 billion in assets under management, leans on a global network of sector experts to be constantly scouring for the proverbial gold nuggets, Hehir says.

Hotels, left for dead during the pandemic, are viewed as freshly imperiled by the looming possibility of a recession in 2023. Nevertheless, as of early February, at least one more private equity-backed hotel deal was moving closer to fruition, with Trinity in the lead, although the timetable was uncertain.

Trinity’s total makeover of a Maui-based Westin a few years ago remains one of Hehir’s shiniest examples of how to extract maximum value out of an unpolished gem. It also exemplifies the kind of “go where no developer has dared to go before” mentality that accompanies a refurbishment and refinancing of a destination hotel that has been leveled up toward the luxury end of the space.

On the subject how to turn around a moribund property into something trendy, Hehir adds: “The design of the rooms, the restaurants, the meeting facilities, everything gets looked at through a lens of ‘how can we step this up?’ and what you wind up with is a hotel that is able to reposition itself into something akin to a high-end resort, but also a corporate event destination, perhaps with a bit of both elements, but in a city that sorely lacks a high-end type property.”

M&A advisory fees will be lacking if the economy slips into a full-blown recession. Rates went up in the U.S. in February albeit not as steeply as in previous months. The Fed signaled the battle against inflation is a long haul.

Either way, the months ahead are going to be a difficult environment after a frothy period, says Lovell Minnick’s Belke.

“The middle market is the better place to be,” he says. “The mega cap space, that space is quiet, cheap leverage, that’s gone. In the middle market, there is still credit available, there are carve-out opportunities for PE buyers, and if you have done the right things over the years leading up to this point—not taking on too much debt, being disciplined about multiples paid, pacing deployment of capital sensibly – then it’ll be a lot easier navigating whatever tough seas lay ahead.”

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