Vito:
So Hank, we've talked a fair bit in terms of the different factors that are impacting the decision as to whether to launch a sale process, pursue a monetization and the like. One of the areas that we've talked about is that we've seen green shoots in the IPO market and certainly with portfolio companies being in the portfolio longer, I think some of the growth that we've seen within the portfolio companies of our clients over the last few years, these assets are larger on an individual basis than we've seen through the history that we've been involved in the deal making front. And we always talk about dual track opportunities and having a credible IPO market as a realistic competitor to a sale process, but maybe give us an update on what you're seeing there from some of our clients. Is that a concern? Do they need to see that IPO market in order to really move forward on some of these larger assets or is it helpful but not necessary? how are you seeing it?
Hank:
That's a good question. I often think that an IPO versus a sale, there's often an optimal path for the given company and industry. There are markets in '21 where things were all going well, and so both were very attractive, but an IPO is a stage monetization, and so there is a trade-off of cash today versus the present value, which is realized over time, and I think a lot of our private equity sponsors have a bias towards a sale and having a complete exit. That said, the path to go public is, many times, for very large companies, more actionable because the buyer universe is smaller and it's harder, and also there's sectors where the growth characteristics and the future value creation opportunity are better recognized in the public domain.
That said, the credit profile, or the leverage profile rather, is very different in public. And so having to think about while some of these businesses have grown, there's a de-leveraging that's required to go public. And so there's multiple factors that are happening. Yes, we like the dynamic of having a credible threat of an IPO in a sale process, it is another alternative available to owners, sponsors like having multiple paths for exits, so it is attractive, but I think in general, there is a preference for realizing full proceeds from a sale.
Vito:
Yeah. I think one of the ways I've described it to a lot of people is that you're going to certainly consider a lot of these sort of different alternatives, a partial monetization, a partial sale, a continuation fund, but when the ability to execute a traditional LBO, a traditional sale, sell a hundred percent is more realizable in the market, you're going to see people pivot to that, and we've always seen it. And I think our clients in this world are extremely creative, they're on the cutting edge, but when the opportunity comes to do traditional deals, I think they're going to be there. Maybe John, let's pivot a little bit to that financing element. I mean, '23 was certainly a challenging year for the financial sponsor community as they were seeking new financing and we saw the private credit folks provide a credible avenue for them to finance certain transactions.
That market's kind of opened and closed on a quicker timeframe at times. But maybe give us an update on where that stands today and how you're seeing it as the syndicated market and the traditional market is coming back in a way, how are you seeing private credit play? Does it slow down? Is it always going to be an alternative? And what's going on today in that market?
John:
Great question. I mean, fundamentally, private credit is here to stay. It's really going to be part of the ecosystem of leverage finance, and there'll be times when it's a very useful tool for companies and there'll be times when there'll be better alternatives available in the public markets, and so it's really going to be an ecosystem. So we saw private credit take a lot of share over the last 18 months. The real reason is that there are no caps and flex to the extent that we see in our deals, and you've got certainty of financing at the time. Now the challenges of private credit are you're dealing with a very, very small group of lenders and that may or may not give you pause around dealing with them down the road. You also have limited ability to add to those financings if you're in a roll-up or serial acquire situation. I mean, these are big checks that are put out there, but it doesn't mean there's another big check behind them.
But more importantly, as we look forward in a lower rate environment, I think you'll see that some of these deals that were done at the SFR 6-700 level, we will be able to refinance those at compelling rates in our markets, not all of it, but some of it, and that'll be just a better cost of capital achieved for the owners, improving their IRRs. And in addition, if you think about sponsors positioning their companies for either more growth or eventual equity exits, they can't go public with a private credit solution in their capital structures, just either they're too levered to go public or the cost of capital is too high to make the EPS equation work, so they'll have to improve their cost of capital.
I think private capital serves a very good purpose. It's good for middle market financings. I mean, the markets in high yield and leverage loan really don't want to finance a company that's smaller than a hundred million dollars, to be honest. And so there's a home for these smaller companies to get financing, and I think private credit is able to take advantage of market dislocations and when rates get higher or when banks are sidelined, but it's going to be an ecosystem that we all live in and is used sometimes together, sometimes when the markets are not cooperative, sometimes when there's a leverage multiple that's trying to be attained, but I think we'll all coexist and you'll see situations where both institutional deals prevail or private credit deals prevail or they're even intermixed.
Vito:
Great. Well, look, I think that's a positive, especially if there's more alternatives for our clients to help finance a transaction. Ultimately, we're looking for them to be successful on whether they're exiting or entering into a new situation. Maybe with that, let's pivot to a little bit of the industry side. Hank, we've seen robust activity balanced across the board in our pipeline, certainly some of the energy M and A that's been happening on the corporate side has been a big boost to the business, and we're seeing a lot of healthcare and technology M and A, as a regular way as it is every year, leading the way in terms of transactions. But in terms of where you're focused and the types of activity levels that you're seeing, what sectors do you think are going to be leading the way as we look to '24 for deal activity?
Hank:
That's a great question. You're right. We have just seen a lot of activity in the energy sector, and this is a more PE focused dialogue, but shout out to our colleagues who were just on a southwestern transaction this week. But as we look across private equity and thinking about some of the thematic areas, if I think about the industrial sectors, opportunities to play on-shoring, infrastructure, housing related opportunities as mortgage rates come down on the heels of the interest rate coming down. Thinking about infra broadly, it has become a full asset and investment class, and these infrastructure funds are broadening their scope where they're looking for opportunities to have the attributes of infra in sometimes a less traditional sense. Business services has always been a very active area within private equity, and we expect that to continue, whether it's the recurring nature of something like waste businesses or essential services, we've seen activity in HVAC and plumbing, continued rise in outsourcing opportunities, broader scope of asset managers, financial and insurance brokerage.
In healthcare, you cited healthcare and tech are always active and will continue to be. Medical devices and services and spec pharma are all areas where we would expect to continue to see private equity activity, and so as we step back and we think about it, and you made the point, there really is broad based opportunities across... Within every industry group, there are sectors that we believe are well positioned for this coming year. And then within energy transition, when you pull back, you think about the big themes. We advise Brookfield on the Westinghouse transaction, but there's plenty of other ways that sponsors are thinking about, private equity is thinking about energy transition, these very large macro themes.
Vito:
John, in terms of the financing markets, are they more open for one sector versus another right now? Are you seeing any trends there, any distinction, or is it just traditional work?
John:
It's mainly traditional, but what I would say is investors try to anticipate where the markets are going. And so as you look at the possibility of a soft landing in a rate environment that's going to see reductions, industrials, cyclicals, building products, I think those will be in favor because people want to get ahead of being the first or second inning of those kind of recoveries as opposed to buying those deals in the seventh or eighth inning of an economic cycle. So we do expect to see a healthy amount out of the industrial space, and that can take the form of a lot of favors, aerospace, defense, transportation, building products, capital goods. It's a big swath of the area. I do think we'll continue to see some of the energy consolidation that Hank mentioned. That's a big trend going on as well. We underwrote one of the first consumer LBOs in the last year, plus for Shearer Foods for CD and R, which is about to roll out.
I think you'll see some more demand for consumer situations as well. And then technology always has a very good bid in the market. I think it just ebbs on the overall valuation, but I do think those are the sectors that are probably most active. I think healthcare is going to be a little challenging just because we're in an election year and people get very worried about government change and stroke of the pen risk, et cetera. I do think retail is going through its own seismic changes about what that market in that sector looks like, but I think we'll see pretty broad based participation, but we do think cyclicals will be in demand as people want to buy those early in the cycle.
Hank:
Right. And that cyclical comment and the financing associated with it we think is going to drive M and A volume because those are the companies that... There's a lot of those who are attracted to PE and that was a financing that wasn't available last year.
Vito:
Yeah, no, look, I agree, and I think one of the things I'm always excited about, Hank and John, when we talk about our own business is that we're pretty well distributed across all the relevant categories in terms of industries and the like and look forward to all those sectors really participating as we go forward. Interestingly enough, today as we're recording this, this morning was announced a transaction where BlackRock is buying GIC, where they're going to basically triple the infrastructure assets under management that they have have. That's been a sector, and we just mentioned it a little while ago, that we've been extremely active in, and certainly we're seeing that blur across some of the different industries as well. So a lot of good opportunity as we head into '24 and certainly we see some activity growing
As we close up, guys, maybe let's get any thoughts in terms of one or two specific things you're looking for in '24, and maybe I'll start up. I think I'm certainly looking for increased level of activity. I'm certainly looking for increase in traditional transactions, which we've all talked about. And I also think that the second half of the year where obviously there's a presidential election that's going to be going on in the United States and there's a large number of elections going on globally will cause some pause, but the reality is we're going to play through that because I think companies and clients, with the pent up demand and also with their experience historically, are prepared to operate through that. But what are you guys looking for in 2024?
Hank:
Looking ahead for '24, I'm excited by the level of dialogue we're having with our clients. And when I look at our clients and I look at the repeat nature of many of our clients, that is exciting. A lot of the areas we just talked about where we see increased activity aligns well with our platform, and so I'm looking forward to an increase in transaction volume, specifically increase in transaction volume with our private equity clients. I expect that '24 will have M and A volumes much more than that 30 to 35% area in line with historical levels and could exceed. And so I think that is very encouraging as we sit here today.
John:
Yeah, as I said at the onset of our call, the markets haven't felt this good in 18 months, and I haven't been more optimistic in that same timeframe. I think last year was challenging with the Fed hiking rates throughout the course of the year, and a lot of fear about the economic uncertainty and the ability to have a soft landing, but it feels like we're setting up for the 94, 95, 96 timeframe where the Fed did do its job correctly and did have a soft landing and the markets took off after that. So I think it may be back loaded this year, but I do think we will see a pretty vibrant market. I think the sell side activity that Hank mentioned around portfolio companies of private equity that have been owned 5, 6, 7 years, there needs to be monetization. I do think you'll see [inaudible 00:48:14] on and growth acquisition to portfolio companies, and I do think you'll see corporate activity going into the private equity hands.
And so it could be a very, very good year in terms of volume and activity, assuming the Fed stays on course and the economy stays on course and we don't have any things that we really can't factor into on the geopolitical or election front.
Vito:
Well, look, gentlemen, I think that you've highlighted some great points, and I can't overemphasize enough. Hank, as you mentioned, so much of the desktop exercises that we've been going through with our clients have been converting to live transactions, and we're hopefully on a trend where we're seeing more and more of that. And John, the level of optimism as we go into the year, given everything we've talked about today, certainly is at a pretty high level, so hopefully we see that translate as well. So with that, I'd like to thank you both for the conversation. I know that you're both extremely active right now in your respective markets and certainly are bringing real time advice to our clients and to our listeners here today, so thank you for participating in today's podcast.
John:
Thanks for having us, and look forward to more conversations in '24.
Hank:
Completely agree. Thank you, John and Vito.
Vito:
Okay. Okay, sounds good. John, Hank, thank you as always for sharing the conversation and sharing your insights given the work you're doing in the market. So thanks for joining the podcast today and look forward to more conversations in the future.
John:
Thanks for having me back, Vito. Look forward to more conversations in '24. Have a great new year.
Hank:
Yeah, thank you, Vito. This is great. I mean, I think three of us talking and talking about the outlook and what we're seeing is encouraging, exciting.
Vito:
Yep. Sure. Hank and John, welcome to the podcast. I'm pretty excited to have our audience hear your perspectives given that these are regular conversations we're having every single day in the office, so welcome to the podcast.
John:
Thanks for having me back, Vito. Look forward to our conversation on the markets and going into '24.
Hank:
Thank you, Vito. Excited to talk about what we're seeing in the market and the level of activities, especially as it relates to private equity M and A.