High Rock Blog

Acquisition Financing

In 2012 we published our book on mergers and acquisitions ….it is called “Middle Market M&A: Handbook of Investment Banking & Business Consulting“.  One of the topics we address is financing acquisitions and various ways to thinking about getting deals done.  In the middle market, funding strategic deals is often a mix of senior debt coupled with mezzanine and some type of seller financing (i.e. seller note or earn-out).   If your company, as the buyer, is a lower middle market business itself; a key to being credible in the negotiating process is having evidence of financing before you enter discussions.  This essentially means building an acquisition strategy and plan, then obtaining buy-in from lenders and investors before going to market.  An advantage of this approach is having the experience and support of your financing sources early-on and in due-diligence.  Overall this helps improve the likelihood of a successful transaction.

The Value Gap

Our team at High Rock Partners is constantly listening to clients and observing market trends.  In a short video, we captured our view of the quandary of emerging growth and middle market company leaders.  The need and case for focusing on value creation has never been more prominent than it is now …businesses must pursue strategies to become stronger …not just to lead, but to survive and thrive.  Here’s a link to view the video  http://vimeo.com/53096085 The snippet ends by talking about our framework and tools to create value for shareholders; it is called Strategy Navigator™.

Also, here’s a link that talks about the Value Gap on Divestopedia.com

Unitranche Financing

In recent months, I’ve had clients ask about “unitranche financing” ….what is it, what is different, when would you use it and where do you get it?  The definition that we use in the Handbook of Financing Growth is –

“A hybrid senior loan product that blends first and second lien debt, and in some instances mezzanine, into a single tranche.”

A tranche is a round or an installment of funding.  A company typically seeks to maximize its borrowings with lower cost senior (or first lien) debt and then add debt that is increasingly more expensive as the lien position decreases. It is similar to the concept that a mortgage on a house is the cheapest because it has the deed of trust in first lien position in the event of default.  If you then get a second mortgage or equity line of credit, it has a second lien on the property and is a bit more expensive.  Lastly, if you obtain unsecured debt like a credit card …it is the most expensive.  In business, the unsecured debt is usually called subordinated debt or mezzanine financing.

Historically, each type of debt comes from a different funding source.  A business would get senior debt from the bank, junior debt from a hedge fund or specialty finance company, and subordinated debt from a mezzanine lender or growth equity investor (mezzanine is a hybrid debt and equity).

In the market now, there are lenders that have combined all of the levels of debt for a company into a single financing resource (and set of documents) call “unitranche financing”.  This can make a lot of sense when a company needs to get a deal done quickly and with a single lender ….eliminating the negotiations and costs among multiple parties.

The Public Option for Growth Capital

Last week at our local NFA chapter meeting I listened intently to Raymond King of the Toronto Stock Exchange share his insights into the market from the Canadian perspective.  What really caught my attention is the creativity and progressiveness that the TSX has applied in filling the need for late stage venture and growth funds in their country (and how it can be available to foreign businesses too, i.e. those in the U.S.A.).   The TSX has a  platform called the TSX Venture Exchange that enables revenue generating companies that are within a year or two of profitability to raise growth financing in the equity markets …you’ll need to raise $5 million plus for it to make sense.  I was also impressed with the breadth of sectors and industries supported.  For example, the TSX has the largest clean technology public market in the world.

Here’s a copy of the September 2010 presentation with significant background about the Toronto Stock Exchange and the TSX Venture Exchange.

M&A Activity Up; Private Equity Still Cautious

How is your deal activity this summer? I met with Mia Saini of Forbes and had a discussion about the M&A markets. She posted the dialog on her blog Money with Mia ….here’s our video on Forbes Video Network™ about M&A activity.

I also spoke with the folks at GE Capital this summer …and had a chance to share an article that we titled  “Exits & Acquisitions” in their CapitaLens™ newsletter.


Last week we held our monthly National Funding Association meeting in Raleigh. Our guest speaker was Bill Hobbs, Managing Partner of Carousel Capital. Carousel is a buyout fund purchasing companies with at least $3 million of EBITDA located in the Southeast US. In addition to the industry trends and observations, Bill highlighted a phenomenon somewhat unique to our times; we’ve seen the same. That is, valuations for well run and good performing middle-market companies are strong and funding is available. Otherwise, valuations are depressed and deals tough to do …in many cases there’s no deal to be done. This makes sense given the back-drop of historically high dry powder in the coffer’s of private equity funds searching for deals to invest in. In fact, there is the greatest amount of overhang and pent-up capital ever for middle-market transactions.

ACG Intergrowth

Unfortunately I was not able to attend Intergrowth this year. For those not familiar, Intergrowth is ACG’s (Association for Corporate Growth) premier national event. In speaking with a number of attendees over the past week, there was varied feedback and perspectives. In general it sounds like there is real excitement about 2010 and the outlook for getting deals done. Demand is being driven by expected changes in the tax code, by the need for private equity investors to deploy capital, and by strategics with a lot of capital seeking top-line growth that can not be met organically. Champ Davis of Davis Capitalsums it up – “the deal market is back …first quarter was strong and there is significant pent-up demand by both financial and strategic buyers”. There does seem to be a question as to what will happen in 2011 and how the credit constrained debt market will impact the actual deals closed.

IPO Market

Carolyn Saacke, Managing Director, Capital Markets for NYSE Euronext, spoke at our NFA meeting yesterday in the Raleigh, NC.  The group enjoyed hearing her remarks and views on IPO activity and what’s been happening in the market.  One of the notable items for me was the performance of the IPO market last year.  In reading the press and listening to the media, I thought the IPO market was closed and was miserable; not so.  There were nearly twice as many IPOs in 2009 as 2008.  There were 59 IPOs last year which is about half the annual average since 1990 (excluding 1999 & 2000 each with about 330).  The main reason for the improvement was discounted pricing below target of some very good companies. She says the indicators are good for this year, but still not as robust as they expected entering 2010.

I didn’t realize the breadth of global capital markets access through their exchange.  With the consolidation in the exchange market and the acquisition of a number of platforms in Europe, the NYSE Euronext provides access to capital in the US, Europe and the Middle-East.  Not just for the S&P 500 , but also for emerging growth and middle-market companies seeking capital of at least $40 million; the minimum market cap is now $150 million.   This puts the NYSE directly competitive with NASDAQ in most capitalization segments …providing liquidity and greater global reach.

It is encouraging and exciting to see the markets rebounding; especially for mid-sized businesses.

Good News for Middle-Market M&A

Private equity in small and mid-sized transactions may have started to turn upwards.  According to the research at Pitchbook private equity middle-market deals bottomed in the 3rd quarter of 2009 and began to increase in Q4 with $15 billion invested in about 238 transactions; over half of those deals were less than $50 million in value.   Interesting that while there were about half as many transactions in 2009 as compared to 2005, the value of those deals were about the same.

It appears that the equity required to get buyouts done on average for all buyouts  is just about on par with 2006 at a little above 40% …but those deals in the middle-market with values between $25 million and $250 million are taking on average nearly 59% equity with 12% supported by sub-debt and the balance senior debt (as reported by GF Data Resources in February).   They also reported that Q4 2009 enterprise values to EBITDA multiples for private equity deals increases slightly from Q3 to 5.2 from 5.1.

Anecdotically there is an increase in lower middle-market and middle-market deal activity this quarter …I see some enthusiasm and excitement hoping that the volume of activity holds, and that the deals can actually get closed.

Creative Financing Sources

Quarterly we read about new private equity funds being formed, each with a market focus and sometimes a unique twist on the conventional model. In recent years we haven’t seen too many new debt funding sources, though a few. 2nd lien or Jr. debt became popular, funded by hedge funds, prior to the great recession. And we saw the advent of unitraunch credit facilities providing varying layers of debt in a single instrument surface early this decade. In addition, we have seen a some asset based lenders offer hybrid credit facilities; they operate like a line of credit, but have some of the legal mechanisms of factoring …one such firm is Federal National Payables – they have focus on government contractors.

A new financing source has emerged in the past year. Taking from the framework of the stock exchanges, The Receivables Exchange has created a trading platform for accounts receivables. It allows a company with revenues of at least $1.5 million (and that has been in business for at least 2 years) to sell their accounts receivables on an as-needed basis to an open market in a controlled and confidential way. I really like it because it may augment your existing line of credit and possibly increase overall availability. For example, you can sell foreign A/R, which is usually excluded from most domestic credit facilities. Because there is no long-term commitment to sell your A/R, a company can use this credit facility to support tight cash periods when needed and not use it without penalty when cash flow is strong. Since your company is selling invoices either in groups or individually, it may likely obtain a better rate for your financially stronger customers. I was skeptical at first, but after getting to know some of the folks and researching the business I’ve concluded that The Receivables Exchange is for real and will likely be a major player in the years ahead …it is funded by Redpoint Ventures and Bain Capital.