Gold Coast: Mergers Still Strong

By MICHAEL AUSHENKER Staff Reporter The Panelists Jeremy Holland is the managing partner at Santa Monica’s The Riverside Co., one of the largest and oldest global private equity firms targeting the lower end of the middle market with about $10 billion in regulatory assets under management. He joined the firm in 2010, when it recruited him to go from executing deals to originating new investment opportunities in the western United States and Canada. He leads the origination team. Shaun Kalnasy is a partner at Harrison Co., a consumer-focused investment bank in Woodland Hills. He has 15 years of investment banking experience advising over $4 billion worth of all forms of transactions, ranging from strategic alternatives to debt and capital raises. He previously advised such brands as Purple Mattress, Igloo Coolers and Cameron Hughes Wine. Scott Witter works as a managing partner at Breakwater Advisers, a Redondo Beach consulting organization that works only on the buy-side of health care. Prior to Breakwater, Witter worked as chief of strategy and growth at Autism Learning Partners, a leading provider of therapy to children with autism spectrum disorders where Witter led the mergers and acquisitions and new market development efforts. Brent Reinke (moderator) is a partner in the Westlake Village law office of Musick, Peeler & Garrett. His practice emphasizes mergers and acquisitions, venture capital, advising emerging growth companies, corporate securities and finance and strategic alliances. He is also co-founder and a director of Vapur, a consumer brand. He co-produces the Gold Coast Executive Forum with the Business Journal. The economy has been expanding for more than a decade, yet company valuations remain high – astronomically high, by some measures – and corporate transactions are brisk. But everyone knows that a downturn will come eventually, so those contemplating selling their business or making some other big transaction might consider acting soon. Those were among the main takeaways from financial experts at the first Gold Coast Executive Forum of the year, held Feb. 4 at the Westlake Village Inn. Gold Coast, produced by the Business Journal and Brent Reinke of the Musick, Peeler and Garrett law firm in Westlake Village, invites top executives and business owners to a series of gatherings each year. During the dinner event, everything from the effect of Amazon.com Inc. on retailers and the Coronavirus were discussed. But since the topic of the evening was the outlook for mergers and acquisitions and financing for 2020, and since the featured panelists are specialists in private equity and venture capital, much of the focus was on the market for deals. Jeremy Holland, a managing partner at the Riverside Co. who oversees a portfolio worth $10 billion spread over nine different strategies, said that now is a golden era for liquidity, capital growth and transactions. “We’ve never seen anything as vibrant as we have in the last three years,” Holland said. Entering the conversation, Scott Witter, a managing partner at Breakwater Advisers, a consultation organization that works only on the buy-side of health care, said, “There’s a tremendous amount of dry powder.” There’s $5 trillion “just sitting with private equity groups.” With record volumes of mergers and acquisitions entering a seventh year, Witter said his sector of the industry has been very robust, despite some chatter of a market reversal to come. “People are a little bit wary of a downturn, but we’re not seeing it yet,” Witter said. “I’m not seeing anything different. It’s kind of business as usual.” Shaun Kalnasy, a partner at Harrison Co., a consumer-focused investment bank in Woodland Hills, believes that “now is really a good time to sell. “Certainly, we’re long in the tooth in this economic cycle,” he continued. “Now is a good time, in the next three to five years. Witter agreed. “We’re in the 12th inning in a 9-inning game. We’re now three years past the (normal end of the) cycle.” Election jitters? Looking down the 2020 road for potential headwinds, Reinke brought up the GOP mascot in the room: November’s election. “What if we have a presidential change or a change in Congress?” he asked the panel. Holland said investors want certainty more than anything else. “If they’re uncertain, they tend to clam up and won’t want to spend.” At the end of the day, Holland continued, “We just want some kind of stability.” Reinke queried deeper, wondering whether investment decisions may hinge on “who is the candidate. Or is it more than that?” “Probably more than that,” Holland replied. Kalnasy believed that the long view will depend more on just a perception of election candidates. “There is going to be an impact in the market but longer term,” Kalnasy said, “it’s going to be the fundamentals.” Reinke did not want to be remiss by not mentioning the topic of the day: the Coronavirus spreading out of Wuhan, China. By last week, 50,000 cases and 1,100 deaths from the virus were confirmed, and much business activity had seized up temporarily. “Today’s business is a global economy,” Reinke reminded the room. “If you’ve got a company that you’re sourcing from in China, manufacturing won’t reopen in at least another couple of weeks.” “We’re in the consumer space, so we’re in the worst position,” Kalnasy said. However, he added that dependency on China had been in retreat well before the outbreak. “Even before the Coronavirus, with the trade wars, manufacturing (has pivoted to) Vietnam, Cambodia,” he said. Likewise, in light of the recent riots in Hong Kong, a sourcing office had to be shut down there. “We haven’t seen the impact just yet (of the virus fallout),” Kalnasy said. “Certainly, from a consumer perspective for us, it’s a concern.” ‘Astronomical valuations’ Reinke raised the issue of how a company’s valuation can stray so far from its actual worth and profitability. By example, he mentioned WeWork — 2019’s valuation disaster which begot a withdrawn IPO offer, the very expensive buyout of its co-founder and its acquisition by its largest investor, SoftBank Group. “It was flabbergasting at how different the investment market is (from years ago),” Holland added, citing how business-to-business sector now sees “just astronomical valuations.” Roughly 21 or 22 years ago, he typically saw company valuations of four, five or six times EBITDA, or earnings before interest, taxes, depreciation and amortization, a measure of gross profitability typically favored by financiers. Now, he’s seeing valuations of four, five or six times revenue – much higher. “It’s getting tougher. You definitely don’t want to be, in 10 years, explaining why you bought this company.” In the health care space, Witter also said he has been seeing strong multiples on acquisitions. “There seems to be a lot of deal flow,” Reinke asked the group. “What’s the quality?” The panel appeared to agree that many of the best companies have already been invested in and now riskier investment offerings are more common. “It’s been a little bit softer in the last two months,” Holland told Reinke. “Now we’re seeing a lot of public equity firms (supporting a business that is) a problem child; a company that just never grew, but they put it out there. We seem to see a lot of that now.” He added that his firm’s strategy has been to build a global footprint by turning to outside markets ripe with acquisitional fruit. “Australia is a mature economy,” he said. “We bought a software business in Australia.” Kalnasy agreed that “it’s a bit of a mixed bag” when it comes to the quality of companies now being offered; that many of the companies coming out of Silicon Valley have been tapped out and investors “have seen the writing on the wall and are making a path for the exit.” Ditto in health care investment, Witter confirmed that it was “much harder to find quality deals,” he said. “There are 40 to 50 private equity platforms that fight for the same opportunities.” That said, Kalnasy stressed, “I have yet to see any stupid capital. I haven’t seen it.” Kalnasy added that private equity firms have started to specialize or go more niche. “One thing we’ve seen with the influx of capital is that private equity differentiating themselves,” Kalnasy said. A good private equity entity “as the right partner will make a whole lot of difference,” he said. Holland added that for firms like his, it pays to make targeted hires. “We hire a lot of former investment bankers,” Holland said. “Hiring someone who is a specialist in a niche can make all of the difference in the world. Whether it’s attorneys or investment bankers. My point is, the great professionals are worth it, (it’s crucial) not to go cheap.” From there, Reinke turned to the audience for questions. A woman asked, “What would be the first type of indication you would look at that would indicate a contraction in the market?” For Kalnasy, it would be “tightening in the capital spectrum, especially with the credit guys. They are very risk-adverse.” Recalling the market crash that preceded the Great Recession, Kalnasy noted that all is generally cavalier right now but that could end at any moment. He said a “black swan” could upend the market, although “we don’t know what that event is going to be.” E-commerce concerns A discussion ensued about e-commerce dominating business. One man noted that he sees more Amazon delivery trucks on the road than any other kind. The Amazon impact is on a category-by-category basis,” Kalnasy added. “Look at what both Amazon and Walmart are doing. They’re trying to get very vertical in the area. “That chunky middle is going away,” he continued, referring to such stores as Macy’s, JC Penney’s and Kohl’s, in favor of Nordstrom and TJ Maxx. “But if you’re in the chunky middle, you can’t compete with Amazon.” Kalnasy predicted that Amazon will become the chunky middle of the future. “If you want quality, you are not going to go to Amazon, which is too broad,” he said, mentioning that other e-commerce sites will offer better niche products. Reinke took a final question from the audience and the conversation reverted back to China and the Coronavirus once more. All the panelists could say was that the outcome regarding China, in the arena of the recent trade deal, the outbreak, and the economic toll on the U.S. market, was a wait and see exercise. “We don’t sell a lot into China,” Holland said. “We definitely source from China. It’s not the most clear and forthcoming government in the world. It’s really tough to know what’s going on there. We don’t really know what the real Coronavirus numbers are.”