GaP Co-Founder Matt Gilbert Interview with Opus Connect

GaP Co-Founder Matt Gilbert Interview with Opus Connect

Marjory Loebe

May 8, 2024

How has the current interest rate environment created headwinds for you?

Several headwinds have emerged in the Investment Banking space. They include:

Valuation Pressure:

• While equity markets have plowed forward in the face of the rapid succession of nine interest rate hikes in 2023, middle market and lower-middle market M&A valuations have not been so fortunate and have experienced considerable downward pressure due to reduced ROI through the impact of debt service obligations on cash-flow at these elevated rates.

• Additionally, elevated transaction costs, uncertainty over projected cash flows, and a reserved private equity purchasing community have been contributing factors to average and median M&A valuations falling year-over-year.

Reduced Deal Volume:

• Deal volume in the lower-middle and middle-market was down considerably in 2023 compared to 2022. 2024 appears to be a bounce back year for deal volume but it is also one where the players are cautious due to the interest rate impact, impending elections, and now Capital Gains tax uncertainty (again).

• Statistically, both volume and pricing have been in a downward trend since the peak of 2021 as transacting parties face interest rate- and financing-driven headwinds that remain persistent.

Macroeconomic Challenges:

• The global M&A market also continues to experience volatility due to macroeconomic, geopolitical, and regulatory challenges. This keeps downward pressure on local, regional, and segmental markets as few want to be the firm bucking the trend.

• For all of 2023, global M&A activity dropped 16% from the previous year, reaching $3.1 trillion. 16% is a significant driver of market psychology which is currently cautious.

• M&A markets in Europe and the Middle East (EMEA) faced even greater challenges, with a 30% decline in M&A value and a 29% drop in deal volume in 2023. Again, these statistics drive local psychology.

Strategic Importance of M&A:

• Despite headwinds, CEOs across US industries recognize that M&A remains a vital strategic lever to expansion and that baby boomer businesses can be bought fairly to drive growth hungry investor demands.

• Organic growth, which often pales in comparison to effective M&A strategies, becomes less attractive when significant strategic shifts are required. This broad expansion mandate is forcing M&A to remain relevant in spite of the higher than recent interest rate environment.

• It has been reported that companies making multiple small to midsized acquisitions annually over ten years have delivered better shareholder returns than those relying solely on organic growth.

To summarize, the interest rate environment has created headwinds by affecting valuations, deal volume, and overall market dynamics in the lower-middle market M&A space. However, dealmakers remain optimistic and continue to navigate these challenges strategically to meet shareholder growth demands.

How do you approach the process of building trust with potential clients? I.e., giving market updates, meeting for lunch/dinner, being available to answer questions, etc.?

Face to face and belly to belly meetings still have the greatest impact. However, in the post-Covid environment all parties have become comfortable with and accustomed to video conferencing. Given sensitivity to expenses, video conferencing has taken a lion’s share of the trust building and meeting cadence in our firm. We see no downside effects to this trend, and it has served to make us more efficient with our time.

How has your dealmaking process changed when considering the higher degree of selectivity from PE firms? What are some ways you screen potential deals for quality?

We tend to employ several strategies to screen opportunities for quality. They include:

Client Quality Assessment:

• We measure and consider factors such as the client’s track record, financial stability, and reputation.

• Metrics like pursuits per deal and total recommended buyers help us gauge client quality.

• We also separate the shareholders from the business and evaluate each independently before we evaluate them as a whole.

Buyer Targeting:

• We focus on identifying suitable buyers by assessing the fit between potential buyers and the target company.

• Early on we vet the buyer’s ability to fund and close a transaction of the size contemplated.

• Pursuit rate per transaction comes into play in this process.

M&A Process Effectiveness:

• Efficiently progressing buyers through milestones is crucial to our process’ impact.

• Effective progress is culled and qualified by metrics like NDA execution, requiring proof of funds and ability to close, quality and frequency of Q&A, IOI submittal, LOI submittal, etc.

• We will not engage with a prospect who demands we deviate from our processes.

Quality of Earnings:

In the LLM, where information is less readily available and often scattered in location and quality, we perform a sell-side QoE exercise to confirm expectations as well as to assist potential buyers with their diligence and confidence.

In essence we use a combination of client quality evaluation, buyer targeting, process effectiveness, and specialized industry knowledge to screen opportunities for quality.

Some i-bankers that I talk to have noted an increase in the number of PE firms contacting them about deals. Would you have any thoughts as to why this might be the case despite increased PE selectivity?

Over the past five years, the private equity market has witnessed a significant increase in “dry powder” – some thoughts:

• It has been reported that as of 2023, global private equity dry powder has reached an unprecedented $2.59 trillion.

• This substantial amount represents capital raised but not yet deployed. This is why there’s been such an increase in PE pressure to find and complete transactions even in the face of the headwinds we’ve discussed above.

• As a comparison to Five Years Ago (2019) - reports indicate that the current dry powder level of approximately $2.59 trillion is roughly double the amount that was in the market five years ago.

What sectors in the mid-market space do you see as a trend in the long-term?

All that aren’t subject to major technology disruption making current business models obsolete.

In spite of the headwinds discussed herein, we remain upbeat that high quality buyers are in the market for lower-middle and middle market businesses. Additionally, we have been consistently successful at orchestrating transactions at the upper end of the value range, which further encourages us that our unique approach and rigorous processes are market leading techniques in today’s M&A climate.

Often, few quality choices exist in sectors of interest, making a well-timed offering one that draws significant competition driving price and terms in favor of sellers.

Gilbert & Pardue Transaction Advisors (GaP) is a Houston-based business advisory firm serving lower middle and middle market business owners from coast to coast through representation for Mergers & Acquisitions. Matt Gilbert and Bret Pardue established GaP to provide owners of privately-held businesses – those businesses generally enjoying annual revenue of $10-$80 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully integrated expertise to every engagement. No other M&A firm serving the lower middle and middle market provides the quality of representation and transactional expertise that we do.

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