With interest rates being higher than relatively higher over the past few years,
debt's a bit harder to secure all things being equal. Cash flow companies are in
high demand. Where are you seeing valuations? And this kind of starts, we can go
down the list or the panel. Like,
how are private equity valuations over the past two years in any thoughts of where
it's going. In the end of the day, as we say, interest rates really don't matter
because they're factored in both on the buying and selling of companies. So a very
example, if you're in a high interest rate environment and you're selling your
company, you have the opportunity to reinvest immediately in high interest rate
products as your investments. What's more important today is how much can that
company be improved? What's the opportunity? Is it a company that's been through
three iterations of private equity firms? Well, maybe the juice is all out of that
lemon, but it's a family -owned company with improvements to go. It can still return
a very handsome valuation, and it shouldn't be a big concern. Remember that the
growth, the birth of the LBO market was in interest rates higher than today.
I would say where I work with is in the technology space. And what we're seeing
is, you know, in the peak from 20 to 22 is really high. And now they're
moderating, but our valuations we're seeing are still one to two times lower than
what they were. This affects sort of two things in the private equity world, your
current holdings, and then your deal sourcing. So what you're looking at with your
current holdings, are you in a buy, high, sell, low, because you bought during the
peak, and private equity holds for three to five years, typically. And so now you're
like, well, what are we going to do? So you've got sort of three options you can
look at. You could sell, reallocate your capital, invest it somewhere else. Or what
you can do, and a lot of them are doing, is how do we have some good financial
structuring to extend the whole time and look for the operational efficiencies because
you can get the premium multiple if you've got the cash flow positive, you've got
growing EBITDA and you've got growing revenue. That's where you're going to get the
win regardless or you can get creative. Maybe you're doing some dividend
recapitalization, you're doing some partial sales, something to get your LP some
funding back. What we're seeing on the deal sourcing side is not going after trophy
hunting. It's not just about where's the fast growth on the top line. It is more
about pre -deal planning. So if you're working with private equity now, they're gonna
take a little bit longer on their diligence 'cause they wanna see whether or not
you have multiple pathways to value creation. Not too worried about the interest
rate, but let's get the value. - What are you, from a liquidity standpoint, from
deals actually getting closed, do you see that getting any forecast? I mean, I know
forecasting stuff, but like, what's the tenor? Is it just still really locked up out
there? Or do you see more deals kind of getting towards the end where it's
something's going to occur? There's a lot of desire to have the deals end because
there's there's more opportunities and in a fund, it's the capital's tied up until
you can exit. So there's a lot of interest in exiting, but not at the cost of a
much lower return? - Yeah, I would say interest rates haven't changed valuations as
much per se. What it has changed is the companies actually have to work. So there's
less arbitrage, if you will, but it definitely pulls behind the curtain of what
you're actually buying, and the cash flows and the operational efficiency is that's
what's been said. It does parse away companies that aren't operating as efficiently
as they should. So that's what we've seen interest rates change in terms of deal
flow in portfolio companies that we're looking at.