Private Equity Briefcase
May 5, 2009
Starting Small May Lead To Something Big
Despite the ever-mushrooming number of independent M&A advisory boutiques, it doesn’t take a genius to realize that the middle-market dealmaking landscape has changed. The pace of M&A activity in the middle market has slowed dramatically, having been hit hard by the same challenging macroeconomic and credit-market conditions as the $1 billion-plus M&A business.
On a year-to-date basis through mid-April the number of middle-market transactions had declined 44% to 556 announced deals, compared with 999 for the same period in 2008, according to Thomson Reuters and Robert W. Baird & Co.
Additionally, the time it takes to complete deals in the middle market has also turned out to be months longer than in years past. The reason is corporate clients by and large are tasking their investment banking advisors to offer a broader range of strategic growth options than simply identifying non-core divisions to divest or assessing what sort of transaction solution can solve a funding gap, as was often the case during the M&A boom years, says one veteran investment banker at a New York boutique.
It’s not hard to imagine the let-down that transaction-oriented bankers used to the adrenalin rush of striking the next deal are experiencing. The new direction corporate clients are taking, too, isn’t exactly unlike the mindset in private equity, where the real opportunity lies in the future.
The emphasis on strategic options also has a side benefit for M&A practitioners. Investment bankers now have the chance to exercise creativity in ways that many haven’t had since business school, as well as operate in “uncharted territory,” as the chairman of a large New York private equity firm recently characterized today’s deal environment. What it all adds up to is opportunity.
Middle-market M&A shops also stand to benefit from the change in traditional advisory assignments.
Investment banks led by former bulge-bracket bankers like Ken Moelis are embracing the chance to secure larger transactions down the road by planting seeds in the middle market. This month’s issue of Mergers & Acquisitions: The Dealmaker's Journal, for instance, points out how New York’s Moelis & Co. has been establishing ties with "smaller" businesses in order to snag “tomorrow's elephants.”
The move is a testament to the effectiveness of the relationship-oriented style of banking, popularized by middle-market boutiques like the more-than-two-decade-old Sperry Mitchell & Co. It also helps explains why Moelis & Co. has won its share of high-profile M&A mandates in the last few years, and why the investment bank run by Ken Moelis won the title of M&A Advisory Firm of the Year by Mergers & Acquisitions.
Moelis & Co., in short, has set its sails to face the winds of change. That’s not exactly a bad approach to take when yesteryear’s map no longer resembles today’s territory.
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