2024 FSG Mid-Year Report – Interview Transcript

Riveron Interview with Michael Funkey, Managing Director, and Tony Doesburg, Managing Director

• Solomon Partners: Can you provide introductions and a brief overview of Riveron?
  • Riveron: Founded in 2006, we help professionals simplify and solve complex business problems. Riveron partners with CFOs, private equity firms, and other stakeholders to maximize outcomes. Our teams bring industry perspective and a full suite of solutions focused on the office of the CFO, M&A, and distress. In 2023, the company was acquired by affiliates of Kohlberg & Company from H.I.G. Capital – which is continuing its partnership with Riveron through a minority investment and we now have 16 global offices.

• How have you seen the market within 1H 2024 within Transaction Services vs. prior years?
  • The M&A market in 1H 2024 has benefited from 1) stabilization of cost of debt: by January 2024, most had gained confidence the cost of debt had peaked, and while higher than historical averages, has been stable throughout the year, providing a critical, much-welcomed level of certainty absent since early 2022; and (2) functional credit markets: private credit, albeit at a higher cost, has been as accessible as it’s been in several years in 1H 2024, as concerns / uncertainty related to macroeconomic, recessionary concerns have largely subsided.

• Are there other divisions that have been as active within Riveron?
  • Our clients, both corporate and private equity, are under pressure to continue to grow profitability despite the challenges faced in the current higher cost of capital environment.  Our Performance Improvement and Technology Enablement offerings have seen historically high demand as the need to enable more efficient and streamlined operations to meet the uncompromising expectations of stakeholders remains ever present regardless of macro-economic conditions.

• Can you provide insight into the number of mandates that have translated into closed transactions? How does this compare to 2023 and 2019?
  • With that rapidly rising cost of debt throughout 2022 and early 2023 and the macroeconomic uncertainty through much of 2023, we certainly saw challenges in successfully closing transactions vs historical norms, scene in prior years including 2019. As private equity buyers, in particular, face a different equation in this higher cost of capital environment, elevated scrutiny and level of expectations toward the quality of a potential investment’s infrastructure, systems, financial/accounting functionality and much more.

• Have you experienced a narrowing of the bid / ask spread?
  • We’ve seen some incremental progress throughout 1H 2024.  While high, the cost of debt has stabilized.  As potential investors adjust their valuation models and investment strategies, we’ve seen progress and expect momentum to accelerate as investors adapt and competition for quality assets continues to increase.
  • Leveraged financing is no longer enough on its own to meet shareholder expectations; and as such we’ve seen a material increase in the level of expectations of Buyers as it relates to sell-side readiness.  Demand for Riveron’s broader sell-side readiness solutions has increased incrementally.  Financial advisors have seen the critical need for businesses to make investments in things like streamlined FP&A reporting, integration, ERP system optimization, and other similar FP&A and operational upgrades – areas that go beyond the traditional financial and tax diligence preparation that sufficed on so many occasions in the extreme low-cost debt environment of the years leading up to 2022.

• For deals that get completed, has there been any impact on time to close and, if so, why?
  • The level of scrutiny of potential buyers has increased substantially. We strongly advise business owners to prepare accordingly. On average, the time from the start of a go-to-market effort to successful close has increased by an average of 45 days in 1H 2024 vs. historical averages. For the time being, in this high cost of capital environment, buyers are taking great care to invest time and resources needed into a far more comprehensive, broad diligence process pre-close to ensure all areas in need of investment post-close are fully contemplated in valuation models.

• Have any new industry trends have helped propel a transaction to close? Would you have recommendations to funds looking to bring an asset to market in this environment? [related to your dashboard/analytics integration comment]
  • The sooner you act the better, even if starting with assessments in certain areas to develop a plan as things continue to evolve in the market.  There are always options if you start early enough – understanding what can be improved and what’s critical to succeed when the time is ‘now’ to go to market and maximize value.  Waiting until it’s time to sell to prepare is the most common, and arguably unnecessarily dilutive, mistake we encounter on a day-to-day basis.  There’s no reason not to plan and there’s never any better time to start thinking about an exit strategy that maximizes shareholder returns than now.

• Is there any relationship between size (EBITDA) and deal activity or success of outcome?
  • In terms of the number of closed deals, in 1H 2024 the largest deals: $500M to $1B (up over 18% YoY as of YTD May24) and $1B+ (up 26.2% YoY as of YTD May24) have recovered more quickly. Meanwhile, all smaller categories were still down YoY with total closed deals down a little over 17% as of YTD May24. It’s likely that the success we’ve seen at the top end of the middle market will continue to add to the growing M&A momentum we’re experiencing as we move forward into H2 2024. The largest assets were prioritized, but the broader market is quickly showing increased activity and following the lead.

• What sector has generated the most and least assignments?
  • Interestingly, we’ve seen the macro trends discussed throughout playing a predominant role in most industries.  There are some sectors, such as building products and industrials more broadly, and others, that started to re-accelerate more quickly than others in 2024; however, the historically large backlog of assets to be sold in the next year spreads across nearly every corner of the market.

• With the current state of the market, has your team experienced an uptick in corporate carveout mandates?
  • We have certainly started to see an increase in recent months as many corporates have implemented many of the efficiency improvements prioritized in 2023 have been implemented and the everlasting high demands of shareholders for continued earnings growth persist.  Adding to this, the full impact of fiscal policy tightening has only just begun to be felt in some important ways; a record number of corporates have been required or plan to restructure debt in 2024 at a much higher rate than what’s been seen in many years. Corporates are demonstrating a high level of awareness to consider whether less strategic and/or underperforming business units should be divested in order to reduce liquidity needs before committing to new financing requirements.

• What is the firm’s outlook for activity through the remainder of 2024 and 2025
  • We will remain nimble, as always, and anticipate a need for continued agility and continuous assessment of conditions in H2 2024.  While we see solid momentum going into the back half of the year in the M&A environment, we’re all still waiting in anticipation to see the first rate cuts by the Fed.  We also have a presidential election to get through, of course.

• • What we do know is that the reasons to be bullish about the near future, including 2H 2024 and 2025, are very real and historic.  Private equity holds 28,000 portfolio companies globally and as of the start of 2024, approximately half had reached a holding period of four years or longer.  This is an incredible number of assets reaching, or at, the end of their holding periods. Add to this the fact that dry powder remains near the all-time highs of more than 1.5 trillion dollars after the historic fundraising of 2021, and you’ve plenty of reason to anticipate a great deal of M&A activity coming in the very near future.