July 2022

Written By Jason Kania

The summer certainly made a dramatic start! Search funds are facing a much-changed environment driven by inflation, interest rates, political tumult, fears of recession, supply chain disruptions, the war in Ukraine, and continued COVID-19 impacts. It is hard to predict the future in any environment and the mixed indicators obfuscate the current and short term economy, and one with meaningful uncertainty.

As your deals advance, consider how economic uncertainty should be reflected in the purchase price or deal terms. Following are a few examples;

Higher Transaction Costs are expected due to higher interest rates and increases in the cost debt financing. According to GF Data, senior debt declined slightly during 2022 Q1 with subordinated increasing during the same period. Greater use of sub-debt caused a price jump with an 11.4% average coupon for sub-debt during 2022 Q1.

With rising interest rates, expect to see the proportion of debt in transactions to decline and additional terms based upon the ability to obtain suitable debt financing. We may see some measure of multiple contraction and see valuations regress to historical averages. Increased financing costs should be offset to some degree, by lower purchase price multiples.

Contingent Payments and a smaller proportion of consideration paid to sellers at Closing. Expect earn outs, seller notes and equity rollovers to command a larger portion of the purchase price.

Longer Diligence. Explore ways to ‘front-load’ diligence or extend the exclusivity periods to allow time for more detailed due diligence and negotiation. For example and in addition to customer contract diligence, a detailed understanding of supplier contracts and any ability to amend the agreement to with more favorable pricing, payment terms or order commitments may help to mitigate the impact of economic uncertainty.

If Matt or I can help you make sense of all that is going on and any impacts to your search, please contact us at matthew@redforestcapital.com and/or jason@redforestcapital.com. In the meantime, please find a selection of resources below to support your efforts. 

RFC SEARCH FUND SPOTLIGHT

KNOWLEDGE-BASE REMINDERS. Available from redforest.com/welcome for a list of resources for each phase of your search. Available to Red Forest Capital Funds Only.

SELECT DEALS within industries of interest for Red Forest Capital funds.

EVENTS

SEARCH FUND TOPICS

POST-ACQUISITION TOPICS

LIGHTER FARE

SUMMER READING

M&A, PRIVATE EQUITY & INDUSTRY UPDATES

HEADLINES. More in the Industry Updates Sections below.

AEROSPACE, DEFENSE, GOVERNMENT, CIVIC & SOCIAL SECTOR

Opportunities remain in industry transformation, commercial and military aircraft maintenance, repair, and overhaul (MRO) services and regulatory compliance with increasing complexity in accounting standards and financial reporting requirements.

AGRICULTURE & FOOD

AUTOMOTIVE & ASSEMBLY

Supply chain disruptions, raw material prices, and labor market shortages are expected to remain a challenge. Increased vehicle traffic and vehicle age are expected to drive demand for replacement parts, maintenance and repair.

B2B, CONSULTING & PROFESSIONAL SERVICES

Expect competition and opportunities in higher-margin staffing, such as IT, life sciences and healthcare.

EDUCATION, TRAINING & SKILL DEVELOPMENT

Increases in digital transformations and work from home has driven demand for up-skilling of technical competencies for employees. The tight labor market and needs of employees are causing employers to offer benefits beyond the financial - that include additional training and career development.

ENERGY, ENVIRONMENT & RELATED

Incumbents are expected to acquire ESG assets to expand green energy hubs, deliver energy transition products and to improve CAPEX discipline.

FINANCE & INSURANCE  

Insurance M&A has shifted from creating efficiency to creating capabilities and expanding distribution. Auto insurers are accelerating driver and behavior-based telematics offerings. Expect competition and opportunities in payment solutions, FinTech, InsurTech, “RegTech” in addition to loyalty program providers.

HEALTH CARE & LIFE SCIENCES

Activity varies within the industry but expect competition and opportunity in Provider Tech, Digital Therapeutics, Tech-Enabled & Value Based Care providers, Pharma-Tech and Wellness. Declining sectors include Healthcare Staffing, Home Health, Rehabilitation and Dialysis.

HOSPITALITY, TRAVEL & TOURISM

Growth is being driven by increased vaccinations, warmer weather, acceleration of ghost kitchens and virtual brands, continued to improve month-over-month.

INDUSTRIALS, MANUFACTURING & MATERIALS

Despite supply chain challenges and labor shortages, industrial M&A activity continues at a frenzied pace. Industrial companies are expected to continue and to use M&A to develop new capabilities, expand near shore or reshoring investments, and enter new markets. In 2021, approximately two-thirds of the deals enabled acquirers to expand into a new business or geography, or develop a capabilities like the Internet of Things (IoT), artificial intelligence, connectivity and automation. Many manufacturers, not expecting a near-term labor solution are investing in robotics and automation.

MARKETING & ADVERTISING

MEDIA & TELECOMMUNICATIONS

Media companies are buying targets that allow them to move beyond video and audio tap into the increased demand for content creation and consumption with acquisitions in gaming, fitness, betting, and location-based entertainment. Telco opportunities in integrated operators, tower and fiber assets are attracting competition from strategics.

REAL ESTATE, ENGINEERING & CONSTRUCTION

Opportunities in the construction of data centers, pharmaceutical manufacturing and distribution centers. Increases in work from home and interest in improved indoor air quality and energy efficiency is expected to specifically benefit HVACR and Mechanical, Electrical, Plumbing, and Fire (MEP/F) and specifically unified thermal moisture wrapping solutions, pre-insulated wall components, and modular and pre-fabricated construction components.

RETAIL, WHOLESALE & CONSUMER SERVICES

TECHNOLOGY

TRANSPORTATION, LOGISTICS & PACKAGING 

Transportation & Logistics M&A continues at a more moderate pace when compared to 2021. Strategics continue to represent the majority of the transactions as they aim to expand and gain market share through M&A. Expect opportunities and competition in trucking, Air & Express Delivery Services and specialty Third-Party Logistics (3PL).

WASTE MANAGEMENT & RECYCLING

Increased consumption and e-commerce has led to rising waste landfill volumes. Recycled material volumes are rising, driven by increased demand for circular economy solutions and material recovery, especially for electronics.

Jason Kania
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