Once the economy improves, what will corporate buyout financing look like?
Columbus Business First August 17, 2009
We believe that there is great potential for stronger middle market M&A activity in the second half. Sellers’ price expectations have begun to adjust. There is a pent-up supply of deals. One middle-market investment banking firm has reported a two-year supply of transactions in its pipeline. Prospective buyers, especially private equity groups, have been sidelined since the credit markets collapsed, but are eager to re-enter the market believing there are appealing buying opportunities. The availability of lender acquisition financing remains the key question. The debt markets will need to get healthier before we see a meaningful resurgence in deal activity. We expect debt financing multiples will be lower than in the last market. A greater percentage of equity will be required, as well as more capital structure creativity (seller financing, rolled equity, earn-out structures). We also expect that regional lenders will participate more than in the last market. The lenders’ underwriting standards will undoubtedly be more stringent. We believe, however, that the stage is set for improvement in the M&A market.