M&A activity remains strong, as dealmakers watch the markets closely

Gurgovits has noticed greater competition among buyers. More family offices and independent sponsors are acquiring privately held business. While this trend isn’t new, there’s a more disciplined approach.

“Not all of these buyers are created equal, and the market is now doing more diligence and paying closer attention to a potential buyer’s strategy, sources of capital, operating history and track record,” he says.

Family offices are viewed favorably because they’re generally willing to buy and hold a company longer than a traditional financial buyer. This appeals to sellers concerned about legacy. As a result, Gurgovits says some of the largest PE groups are forming funds with longer-term holding strategies.

Farmakis has noticed PE firms acting differently, as well. It’s become a more collaborative and positive experience for those who take on PE investors.

“More companies with PE investors are finding that investors are allowing management more flexibility to operate the business in accordance with their strategies, and that the investors can add value through their experience, allowing a more positive result in the end,” Farmakis says. “This is, in part, because there is more PE capital available. There is competition for the investments, so the PE firms have had to adjust some of their terms.”

Michael J. Lewis is intimately familiar with PE. He sold Quick Med Claims, the company he co-founded, in 2015 to Five Points Capital but stayed on as CEO. In October 2018, Quick Med sold to another PE firm, Perella Weinberg Partners, for a 7x return.

Lewis’ experience is that it remains a seller’s market, with interest rates historically low, fewer good companies available and a lot of equity money to deploy.

“They’re jumping over on top of each other to pay for businesses,” he says of PE firms.

It’s such a competitive landscape and flush market that PE and investment bankers aren’t bringing lenders into a deal until late, and they’re trying to do deals faster, Lewis says.

His 2018 deal closed within three weeks and the PE firm did a lot of the early work before it brought in an outside lender. He says you normally have between 60 and 90 days.

Jeffrey J. Conn, member in charge of the Pittsburgh office, Clark Hill PLC, has also noticed things speeding up.

“The surprising trend we have seen is that usually there is a pipeline that takes some time to come to fruition, but instead there are a lot of last-minute deals that are being put together in a quicker time frame,” he says. “It is like they are falling out of the sky and are not marinating for as long as they typically used to.”

Flush with capital

Catherine Mott, managing partner of BlueTree Venture Fund, and founder, president and CEO of BlueTree Allied Angels, anticipates a venture capital slowdown will follow an overall slowdown.

“If you follow the cycles, when the general corporate market slows down, so does VC. Things get overvalued. There’s too much capital in the market,” Mott says. “There will be some pullback, and some of the companies will suffer greatly for it. Others will manage to hunker down and learn to be capital efficient.”

When Mott first started in VC 15 years ago, she was concerned about finding quality deal flow. Now, young companies are stronger, with more access to support.

“We have been in the position so many times to say, ‘Wow, all three of these are good, but we only have the capacity to do one or two. How do we pick?’ That’s a good place to be in,” she says.

There’s more VC to invest, as well. Mott says VC used to invest around $25 billion to $30 billion a year. Today, the annual investment hovers around $80 billion.

Mott also sees more corporations getting into VC, even though they approach it differently. Corporate investors keep their needs in mind first, she says, but their investment can indicate a problem is truly being solved by that startup.

However, she still sees a gap for later funding rounds.

“They might get their Series A, but when it comes time for Series B, it’s tough,” she says.

Those rounds typically come from outside the region.

“When the company needs $30 million, they need someone who can put in $10 million. We can’t do that. We don’t have that capacity,” Mott says. “We do need that in Pittsburgh, and particularly for the health care companies.”