State of the Market

Ruby Sheera

September 11th, 2023

State of the Market

In a world where political and financial markets are experiencing unprecedented levels of turbulence and uncertainty, staying informed and being prepared has never been more critical. With this in mind, DRAX brought together 15 PE-backed Tech CEOs and sector specialist corporate finance advisors; Alantra, Raymond James, and Rothschild & Co. to explore this subject. 

The event was a hub of rich discussions among CEOs of private equity-backed businesses from funds of all sizes. Topics ranged from challenges in the market to emerging trends and strategies. Some of the key sound bites that emerged during these discussions included:

  • The need to re-evaluate capital structures amid shifting financial dynamics.

  • Constant debt re-pricing means we need to be very mindful when deploying debt on buy and build activity.

  • Sales cycles are taking longer, and more people are involved in the decision-making processes.

  • The corporate finance advisors believe there is now less parity in processes compared to a few months ago. 

  • PE firms fundraising in the current climate are finding it difficult. 

  • Partial rather than full exits seem to be in vogue, with both continuation funds and co-investments increasingly common.

  • Highlighting the need for thorough analysis and clean data when it comes to decision-making.

  • The criticality of working capital as a sign of a good business foundation and story

  • The market is crying out for greater predictability and currently, the sentiment is that evaluation levels may return to where they were pre-covid in 2019. 

  • There was a lot of discussion around AI and how to address risk and challenge and define the risk and challenge... The impact of Google’s digital watermark, Gartner Hype Cycle for AI and the regulator impact of AI-generated content.

“The Market is in Flux” - Fluctuating Markets but good assets still capture great returns.

Alantra made an interesting remark during the event, emphasising the ever-changing nature of the markets. Despite this volatility, Alantra revealed that they had successfully closed 20 global deals. The reported average multiple for these deals was around 20x for tech services, with software companies commanding a higher multiple of 25x. 

James Chapman-Andrews, Partner at Alantra who was present at the event, proceeded to emphasise the event's success and share his insights on the topics we covered:

 I thought the event was excellent. It exceeded my expectations in terms of openness and the quality of the discussion where everyone engaged constructively in the debate.

There is a prevalent underlying nervousness for business leaders about the deliverability of deals in this market, where concerns about the cost of debt, global macroeconomic trends, and the possibility of future recessions linger. From our perspective, there is enduring enthusiasm from strategic buyers and PE investors for businesses with a strong strategic vision, customer value proposition and organic growth at decent margins.

Regarding preparing for exit, defining what 'good' looks like in this context is critical. Designing the right process from reading the combination of the business fundamentals, the M&A market conditions and the price/structure dynamics is more critical than ever. Then the decision to launch a process boils down to whether you're fully prepared and whether you're willing to accept the market price if your advisor runs the auction optimally. This, in my opinion, is the most important consideration.

The conversation surrounding artificial intelligence (AI) is changing dramatically. There are strong disagreements about the practical applications of AI in business. We're seeing significant differences in how enterprises and mid-market customers use AI. It's not just about cutting costs; it's about understanding how AI can affect both revenue and profitability.

Shift in investor priorities, with a focus on delivered outcomes.

One of the market shifts Raymond James discussed was a shift in investor priorities. They have seen a continued shift away from the “growth at all costs” mentality, and instead placing much more focus on the “bottom line”; delivering profitable growth, underpinned by strong margins and cash conversion.  This shift indicates a more holistic approach to business operations and investment decision-making.

Laura Maddison, Managing Director from Raymond James, represented the firm and shared her perspective on the market's current state. She also highlighted several key themes that were discussed during the event:

Whilst there has been a meaningful step-change in M&A volumes over the last 6 months, we do continue to see deals getting done and a number of them hotly contested, at extremely strong valuations. In terms of the open forum discussion, it felt like there was cautious optimism within the room and a keen desire to see how the current markets will continue to evolve in the coming months. It was really valuable to compare the market perspectives that we are seeing as M&A advisors, vs. the “on-the-ground” perspectives from the CEOs sat around the table; each of them at a different stage in their hold period with their respective PE backers. 

In addition to the broader discussion on M&A, Artificial Intelligence (AI) emerged as a significant theme that was high-up on Boardroom agendas and one that will undoubtedly continue to be a prominent feature in the coming months, both operationally and for M&A.

Navigating Uncertainty

Market uncertainty looms large, and CEOs are working hard to overcome it. Rothschild & Co highlighted the importance of providing expert in-depth analysis and hands-on execution from start to finish. It is vital to tailor the best strategy and timing to achieve the best possible results.  This serves as a reminder to exercise prudence and engage in thorough analysis before making significant market moves. Long-term success requires striving for informed decision-making.

Overall, the event provided a unique opportunity for industry leaders to come together, exchange ideas, and glean insights from one another's experiences. The soundbites and discussions that emerged carry valuable lessons for both seasoned professionals and newcomers in the market.

Daniel Domberger, Managing Director at Rothschild & Co, also provided us with his insights on the events and discussions that took place:

It’s always a pleasure to participate in an open conversation like this, with a group of leading CEOs as they share, in a safe and informal space, thoughts on the challenges and successes they’re experiencing in the market. 

In this noisy macroeconomic environment, it's the rigour of preparation and the quality of advice that make the difference between an exceptional outcome and a failed process - being ready to transact when the stars align, rather than seeking to time the market. There was a pretty clear consensus that a good business, well-prepared and with good advisers alongside, will enjoy significant acquirer and investor interest throughout the cycle.

Overall, the event provided a unique opportunity for industry leaders to come together, exchange ideas, and glean insights from one another's experiences. The soundbites and discussions that emerged carry valuable lessons for both seasoned professionals and newcomers in the market.

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