Value Investing Forum 2022 Scaling Up: Stressed and Struggling Investment Trends | McDermott Will & Emery

Below are the main takeaways from the discussion:

1. The session began by asking the panelists about current trends in evaluation. Mergers and Acquisitions (M&A) looks very different in 2022 due to a large amount of excess capital, the environment for private equity fundraising has changed significantly and investors are able to explore opportunities in new sectors such as maritime transport, food and agriculture. Additionally, investors recognized the increased interest in special purpose acquisition companies (SPACs) and calls for bailout funding. Despite such volatility, investors are optimistic about the future and have found that to proceed in this environment, investors cannot rely on valuation alone. The focus is on due diligence as investors are less dependent on contracts and more focused on the life of a business as they want to understand the whole target business to determine if it is viable.
2. Sean began his discussion by noting that the current and favorable investment environment (which has not been the case in past years) has given investors the opportunity to explore new opportunities due to a large amount excess capital. He also highlighted the importance of due diligence in a volatile market, going beyond just contracts that result from volatile valuations. Sean further noted that due diligence can be extremely useful in assessing the lifespan of a target company and whether it is possible for said target company to create cash flow or a solution that provides additional capital. Sean concluded his discussion by stating that the focus is on finding “scammers” that private equity firms can donate cash to so they can sustain their business successfully and explore different niches like industrial food and shipping. Ultimately, Sean said he was optimistic about the next 18 months as due diligence is carried out on distressed businesses (i.e. businesses that, if they had the cash to reach l other side would generate cash flow and operate successfully).
3. David explained how a combination of the current global political climate, energy, inflation and supply chain concerns has caused huge volatility in valuations, necessitating greater due diligence. Michael added that there are a host of industries and volatility in sectors that have never existed before. When asked what metrics he uses when evaluating a target company, David shared that his firm focuses on “front-end” screening, which includes equity screens and equity structures. cash flow. He also touched on the challenges businesses may face since the explosion of SPACs in 2022 and which will continue to grow. David concluded by stating that 2023 could be the year of the food and plantation business.
4. Vikas pointed out that 2022 looks quite different from an M&A perspective than previous years and that most deals have been completed through thoughtful and creative refinancing. He noted that these transactions typically involve debt-to-equity conversions and out-of-court settlements. Vikas noted that wages, inflation, cash flow and supply issues all cause huge volatility in valuations, however, such conditions can also bring new opportunities. Vikas explained that default statistics carry very little weight (because he focuses on liquidity) and further noted that due to such volatility, new metrics should be based on fundamental analysis. This is especially true in the technology sector, as investors were focused on revenue and other aspects of a deal and leaving other areas unaddressed or missed could be a problem in the future.
5. Michael spoke about the current investment environment, noting that from an investment perspective, he remains optimistic because there is so much excess capital. This excess capital gave investors the opportunity to make creative deals, playing with debt and equity. Michael also noted that he had received more calls regarding SPACs and bailout funding than in previous years. He further noted that in the current climate, there are not as many special business plans being funded. Rather, it is the marginal schemes that are funded. He thinks there could be a rise in the troubled market, but not in the near future. Michael shared that while the current geopolitical landscape, including supply chain issues, the Russian-Ukrainian war and volatility in the energy sector, has created challenges, it also provides opportunities in new markets.