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Business Development Strategies In Flux: How Deal Professionals Are Approaching A Post-Covid Landscape

By Lou Sokolovskiy, Founder & CEO at Opus Connect
October , 2020

There is no question that Covid-19 created a stark situation of before and after in nearly all industries. Things are different now, more digital, virtual, and slower to generate results. Expectations must of course be adjusted accordingly as we make our way into uncharted waters within modern business. As we begin to return to full speed, many will face an uphill battle as deal flow begins to normalize – making now an excellent time to take the temperature of middle-market M&A professionals at the beginning of Q4 2020.

Opus Connect sent out a business development survey in September 2020 to speak directly with deal professionals that have gone through the challenges that Covid-19 posed and are beginning to come out the other side – a bit battered, but still hanging in. The goal of this piece is to provide the findings of that survey and give our audience a quick yet thorough picture of the present deal flow landscape.

Obviously, the travel industry has been hit extremely hard and that is reflected in our survey results, as 79% of our respondents had yet to resume regular business travel at the time of this survey. In a similar vein, virtual settings are working well, as the industry adapts to Zoom life, to help connect with their peers and allow networking at virtual roundtables much like our Opus Connect events. A robust 95% of professionals told us that virtual settings are working for them, thankfully enabling some aspects of the deal flow process to continue.

However, that doesn’t mean that deals have returned to previous levels– just that professionals are adapting as best they can given the circumstances. Responses very clearly indicate that deal flow is not where it was, with more than half of the survey respondents (57%) telling us that while there is “a surge of activity on the sell side and many inquiries from buyers,” deal flow is not yet where it needs to be to constitute a recovery from what McKinsey and others have termed a “Great Reset” or a “Great Pause” during the Covid-19 lockdown. When expanding upon that query, many professionals rated their deals at around 50% of normal, with a few rating it 20% or lower. It is worth noting that our pool of responses come from professionals in a variety of industries, so some variation is to be expected, but the average response indicates that there is a long way to go before deal flow is as robust as it was in years prior.

Several of those surveyed mentioned that restructuring activity has picked up, which makes sense as companies faced with less revenue need to adapt, streamline, and shrink according to global economic activity. Middle market M&A professionals have closed deals, with slightly more than half (52%) of our professionals telling us that they closed deals since the start of the pandemic. The lack of deals closed demonstrates that this is a 50/50 endeavor – but everyone is facing those same odds. Meeting in person is still favored, but less important as the industry taps into what were likely underutilized methods of conducting business virtually, with one response noting that they had “launched several new deals and have a huge backlog to be launched in the next three to four months.”

Strategies for business development are at the heart of the middle market M&A industry, and it was illuminating to hear directly from professionals as they implement both tried-and-true methods for business development and also bring new ideas to this changing landscape. A few responses we’d like to highlight include the following:

  • A greater focus on liquidity and leverage
  • Organizing more webinars and publishing more research
  • A stronger interest in local companies that can be reached by a drive rather than a flight
  • Utilizing virtual meetings to reach groups and meet people that I probably would not have otherwise; utilizing virtual formats to stay top of mind with referral partners and potential clients
  • Focus on add-ons while being patient with new control platform opportunities; more junior capital/structured equity deals are appearing in this uncertain liquidity/financing environment
  • Focus on special situations (distressed) businesses; have leveraged webinars and direct emails to keep in contact with clients and prospects

Some excellent strategies from respondents that can be implemented by anyone in the middle market M&A industry include these five actionable suggestions:

  • Make more phone calls, send fewer emails. More humor, less dwelling on the depth of the current issues. More manners, less “onto the next Zoom/call.”
  • Increase your virtual, one-on-one coffees instead of the typical quick catch up phone calls to spend a little more time with the business contact and achieve a higher quality of connection
  • Mine existing networks to convert contacts into clients
  • Create a system of referrals to have on hand during calls to fill a potential client’s needs right away (greater reliance on word of mouth)
  • Focus more on understanding the non-business aspects of a client/partner’s circumstances to orient the stress levels, and challenges on timing

The last portion of our survey focused on harvesting, maintaining, and building relationships, which are the three phases of business development that Opus Connect targets as we strive to increase our members’ network of meaningful and long-lasting connections. We asked how M&A professionals were moving through these phases in 2020, with nearly every response in the “harvesting phase” mentioning more virtual and digital outreach, attending webinars and similar events, and focusing on one’s LinkedIn connections and creating new relationships. Many were more focused on the “maintaining” and “building” phases, with one respondent noting that it is:

“…more important than ever to boost communication levels with our current investors in order to maintain and continue to build those existing relationships. We have been successful in ramping up communications with our current investors with thorough transparent operating updates, consistent virtual meetings & timely updates regarding new opportunities.”

Other excellent thoughts focused on the realization that being a “resource for others whenever possible,” as well as “keeping connectivity with existing relationships and strategically targeting new ones” was proving the most valuable in the long-term as we collectively forge ahead in the aftermath of Covid-19. One respondent in particular shared that they are “executing on deals currently in process and building a deeper rolodex of financial sponsors across different geographies, industries, deal size, and deal structures,” which provides a good model across multiples industries going forward.

We encourage our network to use this information to remain proactive rather than reactive as the deal pipeline picks up, no matter the industry vertical. Of course middle-market M&A has been deeply affected by this period of turmoil, but the road ahead shows opportunity for greater connection through thoughtful business development strategies that aim to create more robust networks, stewardship of existing relationships, and a more agile approach to deal flows taking place in a digital future.

Independent Sponsor Report 2020: A Window Into Middle Market M&A After Covid-19

By Lou Sokolovskiy, CEO & Founder at Opus Connect
October 2020

Introduction

Independent sponsors and capital providers within Opus Connect’s extensive middle market M&A network are a valuable source of insight into the current state of their deal flow during the first eight months of 2020. Our findings in this report seek to illuminate the ways in which independent sponsors have both adapted to change and where they continue to pick up and go forward after a pause during the global economic slowdown. The inherent variability in the independent sponsor model led to a diversity of responses within participants’ deal flow and access to capital.

This report provides a collective knowledge base for how a cross-section of independent sponsors are responding to changes in their deal structures. Opus Connect’s goal is to act as a resource and deal community for current and potential members, conducting this research with the goal of providing a window into the current state of the middle market. A tool for future success, the information gathered aims to promote awareness of current practices as well as the speed and growth potential for deals going forward. Business development strategies are continually changing and growing alongside an industry that is now seeing greater utilization of digital resources and new technologies as some – but not all – parts of the deal process transition to virtual interactions and events. As the global scenario changes, business processes adapt alongside it.

Thank you to our esteemed survey respondents in this market for sharing their timely experiences and discussing the impact of Covid 19 with us as we all cope with the curveballs of 2020 and the unexpected issues that arise from shifting the ways in which we do business during a global pandemic.

Snapshot of the Family Office Investing Universe: A Q&A session with Michael Felman of MSF Capital Advisors

By Nancy Vailakis, Senior Advisor at Socium Fund Services
October 6, 2020

Michael Felman is President and CEO of MSF Capital Advisors, a family office advisory firm with 60+ clients around the globe.

Given the complex variety of needs represented by such a large family office base during a 20 year firm history, Michael has a unique and informed view of the current investing opportunity set. His knowledge spans all popular strategies and structures in play today, from complex private credit funds to independent sponsor deals across a broad array of sectors and geographic locations.

Michael has a deep understanding of how and why families invest and has outlined his views in this interview.

Vailakis: Thank you for agreeing to share your knowledge with Opus Connect members, Michael.

In recent years we have seen a meaningful increase in family office co-investment and independent sponsor deal activity. As you advise around 60 families on such allocations, how would you describe this shift?

Felman: Thank you for having me, Nancy.

There has definitely been a shift to more direct investments by family offices in recent years. Some of the reasons for that shift include:

  1. Payment of fees.
    Numerous studies have shown that fees over time significantly reduce your overall returns.
  2. Return of capital.
    Many funds, whether private equity or venture capital, have not done an amazing job of returning capital to their investors.
  3. Selection Bias.
    There is a risk of selection bias in any co-investment opportunities offered by funds.
  4. Generational inclinations.
    In many instances, the next generation of younger family members may be more averse to the “blind pool” concept as they tend to want more control over their investments. I’ve found that they are also showing this tendency through their philanthropic giving patterns.
  5. Family member involvement.
    Direct investments provide a way for the next generation to become more actively involved with the family office.

I believe there is still a role for independent sponsors to play as these shifts continue. Independent sponsors often help family offices become knowledgeable about their specific strategy sectors and have typically already identified their investment targets, thus negating the “blind pool” model.

Vailakis: Some families, not all, prefer to partner on deals shared with them by other families they’ve participated with many times before. Trust is a clear component of all deal making, but please speak to other aspects of this dynamic.

Felman: With respect to direct deal making in the family office sphere, there are many factors, but here are my top questions or considerations:

  1. As you pointed out, Nancy, trust is the number one factor, really in any investment arrangement including direct deal making.
  2. Does the partner have subject matter expertise that could benefit the family?
  3. How well does the partner know the political landscape if this is a foreign deal. Are they on the ground in the country being invested in?
  4. Can the partner open new distribution channels in the situs of the investment?
  5. What are the long terms goals of this partnership? Is it a buy and hold or an improve and sell opportunity?

Vailakis: What investment sectors and geographic locations are of most interest to the families you currently serve? How did COVID-19 related considerations shift such interest?

Felman: The majority of the families that we serve are not located in the United States. Most of our investments are overseas. We remain interested in developing markets as they are, in our opinion, presenting the greatest growth opportunities.

COVID-19 made us think more heavily about supply chains and how fragile they are. Obviously, there has been considerable growth in e-commerce, internet usage, etc. since the crisis. Cybersecurity and cloud computing are two areas of investment focus for our group.

Vailakis: Over the course of your time running MSF Capital Advisors, what has changed in the family office investing universe and where do you believe trends could evolve from here?

Felman: COVID-19 has created a sea change in how people work. Most people are now working remotely. I don’t see this trend changing any time soon.

MSF Capital Advisors has always been virtual as team members are located around the US and abroad. I’ve been told that other family offices are looking closely at this model if they haven’t implemented it already.

This new model does however have implications from an investment perspective. Obviously, you don’t need as much or any office space. The industries that serve office workers will be negatively impacted. There is more automation coming in the supply chain through robotics, etc.

At MSF Capital Advisors, we like to get ahead of the curve on our investments as the old saying goes, and “skate to where the puck is going and not to where it is presently.”

Vailakis: Do you have any advice for families looking to start investing in direct deals, either through independent sponsor engagement or otherwise?

Felman: Look, there is no free lunch here. If you are looking to make direct investments to save money, then you are often enough being “penny wise and pound foolish.” You could end up costing yourself and your family more money if you aren’t in a position to assess the direct deals well, if, for example, the sector is unfamiliar.

If you are at a point in your life where investments are not your main focus, then I would stick to investing in funds. If you still want to be somewhat active, then I would invest through an independent sponsor or hire a team to reside in-house or as part of a separate entity.

Many more family offices are starting outsourced private equity teams that have only the family as a capital source. Some of them are launching funds for other families to participate in.

Vailakis: As many are anticipating a more comprehensive corporate default cycle in the next 6-18 months, what investment plays seem less risky / more likely to preserve capital and capture upside, as we are poised for a deeper recession?

Felman: I agree there will be a tsunami of corporate and real estate defaults coming in the next 6-18 months. I am not sure what investments will be less risky but there will definitely be a need for capitalfor recapitalizations, workouts, origination, etc. I believe patient capital will be in the ‘cat’s seat’ ready to pick off some plum opportunities.

Thank you so much for providing me this opportunity to share my views, Nancy.

London Roundtable (Dec. 6th): How Challenging Markets Drive New Exit Strategies

London MA events

Author:
Colin Lloyd
Investment Writer/Presenter/Consultant
In the Long Run- Colin Lloyd Consulting
cdlloyd@blueyonder.co.uk

The bitcoin bubble will burst but blockchain will be the foundation of the next technology revolution.’ Opus Connect Member.

The second Opus Connect London event was kindly hosted by Hogan Lovell on Wednesday 6th December at their City offices. Tom Whelan – Head of the Private Equity practice – welcomed more than thirty family office and private equity delegates and introduced the discussion topic:

‘How Challenging Markets Drive New Exit Strategies’

Many delegates agreed that the length of the current bull-market has made it increasingly difficult to find attractively valued opportunities. They noted that the five year private equity deals, which were common prior to 2008, are now typically seven or ten years in duration due to the slower turn-around seen in the new low interest rate/low growth environment.

A major topic of discussion was real estate. New York and London were both regarded as expensive, although a number of members mentioned Chinese interest as a result of the decline in the value of sterling. Rental yield remains the key factor with 5% or higher opportunities still available outside the prime locations.

The discussion then switched to the technology sector. Several members made comparisons with 1999, however a number of family offices still see value. The smaller family office appears to be in a favourable position since they are seldom forced to invest capital in the same manner as the giant VC operators. Relieved of the pressure to invest, the family office can take its time identifying better value propositions and by making direct investments. The general view was that many recent VC and PE fund launches have been obliged to pay hefty multiples of earnings in order to allocate their capital. Investors in these vehicles may have acted in haste, they may repent at leisure.

The large scale capital in-flows, which have been dominated by the giant VC and PE firms, has created a lively secondary market in its wake. Several members suggested that, whilst the term structure of deals has increased the ability to exit via the secondary market has redressed the balance to some extent.

Inevitably the discussion moved on to the bubble in digital currencies. There was general agreement that the bubble will burst at some point but a similarly contrary consensus about the future of blockchain – distributed ledger – technology. As one member put it, ‘The bitcoin bubble will burst but blockchain will be the foundation of the next technology revolution.’

Real Estate Chapter November Panel

Author:

Paul Monsen (Opus Connect Member)
Director – Real Estate Lending at Maxim Commercial Capital

Opus Connect – Investing In Multifamily.
In Mid-November, Opus Connect and Sklar Kirsh hosted a panel discussion that consisted of Neil Schimmel (President & CEO, IMG), Max Sharkansky (Managing Partner, Trion Properties), Henry Manoucheri (Chairman & CEO, Universe Holdings), Jerry Fink (Managing Partner, The Bascom Group), and Adam Peterson (First Vice President, CBRE), and was moderated by George Lintz (President, Bellaire Partners, LLC.).

The subject was investing in multifamily real estate in Los Angeles and the greater United States. Topics included valuation metrics for the current cycle, untapped West Coast markets, LP equity structures, and how to invest in a late-cycle market.

Intro
Adam Peterson kicked off the panel with a boots-on-the-ground perspective on why Los Angeles continues to be a premier investment market. He noted that there are still several attractive markets and asset types, including Long Beach, Highland Park, and rent controlled properties. Adam hedged his advice with a warning about overbid markets, particularly West LA/Santa Monica. He also noted that rent control tenants are getting smarter.

Acquisition Metrics
The mention of West LA quickly brought up the topic of cap rates. General consensus held that tier one market cap rates range from 3-5% and secondary markets providing a slight premium of 4-5.75%, with overheated markets commanding sub-3% rates. Continued cap rate compression has forced investors to rely on other investment metrics, particularly dollars/unit, gross rent multiples (GRM), and asset quality. Cap rates are still important, particularly for exit underwriting. Investors are underwriting to a 4.5-5.5% exit cap for Tier 1 properties, with another 100 basis points added for secondary markets.
Universe Holdings is focused on SoCal properties in the $185k – $325k/door range. IMG likes partially renovated buildings in B+ to A markets that they can bring to market standard. The Bascom Group won’t buy anything with >15GRM.

Operations/Rents
Rent/sf can be misleading in multifamily. One panelist explained that he checks Rent/SF but always focuses on the gross number. Very few renters are doing the math to figure out rent/sf. The average renter is focused on the gross dollar impact on their bank account. Mr. Fink noted that any units priced below $2k/door in LA will rent immediately, regardless of size.

Investor Structures & Returns. 
Panelists were all seeing LPs demand preferred returns of 6-9%, with a 75% (LP) / 25% ( GP) split thereafter, avoiding waterfalls if possible. Bascom detailed another popular structure: 10% pref, 20% promote to a 15% total return, then a 30% promote thereafter.

Trion’s LPs are focused on the deal’s return on cost, and want a 2x multiple on their equity, with a high teens IRR over a 3-5-year period. Further, investors are deeply scrutinizing all underwriting assumptions.
However, the panel admitted that those return profiles are increasingly difficult to achieve. Typical deals today provide a 1.6-1.8X return on equity, an IRR from 12-16%, and yearly cash on cash returns of 6.5%-8%. Mr. Manoucheri pointed out that larger institutions and foreign companies are squeezing out local investors in primary markets, as they are willing to accept down to an 11% IRR.

Investment and Growth Philosophy
Each panelist’s company is continually torn between two competing goals: 1) beat the market and 2) scale. Option 1 is increasingly difficult because competitors have flooded the market while option 2 is beneficial to the company but brings lower risk-adjusted returns. So, each panelist tries to find a niche, i.e. Trion’s focus on tired assets, the East Bay Portland, etc., while IMG needs to have “boots on the ground” experience and fosters local relationships.

2008 Recession & The Next
Mark Weinstein, Founder and President of MJW Investments, added to the panel’s insights by noting that prudent use of leverage is vital at this point in the cycle, with an eye towards long-term holds.
Adam Peterson further pointed out that while LA as avoided the worst of the last downturn, all panelists are actively avoiding C properties and tertiary markets at this point.

Additional Takeaways.
Don’t buy from smart brokers for smaller investors.

Buying off market deals can be more trouble than its worth because they hear 3% cap rates and think that’s what their property should demand.

Trion Properties is bullish on digitizing property & asset management. 90% of their renters pay online.

At this point in the cycle “you don’t need to make money, you need to not lose money.”

Real Estate Chapter May Roundtable

Real Estate Networking Events in Los Angeles

Rebecca Pedooem
Account Manager
Opus Connect
Rebecca@opusconnect.com

Moderator: Robert Clippinger, President at Clippinger Investment Properties

Summary:

Developers can agree that mixed use projects can be challenging in the simplest of circumstances. This roundtable will focus on the following:

Why mixed use?
Why does it work?
When does it not work? Socio/Economic?
Financing Mixed Use
How do retail/restaurant/residents cohabitate?
Parking Issues?
Picking the right retail/restaurant
• Managing Mixed Use
A good, well planned mixed-use project can be beneficial for everyone involved!

From the city, developers, lenders, residents, and retailers, everyone can profit. In this month’s discussion, we heard from the expert Bob Clippinger. (Bio attached)

So why do mixed use projects work? Mixed use projects can attract better tenants, lenders and retailers. Landlords can charge higher rents from tenants and tenants can benefit from the wide range of amenities they can be offered (i.e, coffee shop/mini mart/restaurant). Mixed use projects can also be beneficial to the city because they can create a more “neighborhood feel”- food brings everyone together!

In fact, mixed use developments can alleviate many service needs by providing parking options, convenient retail, accessible restaurants, and residential living quarters all throughout a walkable area. Walkability (walk scores) are popular once again – people prefer this over driving/commuting to different places so from an urban planning perspective, they offer efficiency and a decrease in traffic congestion.

When deciding on developing a mixed-use project, there are some consideration to keep in mind from financing to retail and resident cohabitation. Lender relationships are important because mixed use projects are complicated. Most commonly the 80/20 Rule apply but things can get tricky if you are not properly prepared. Pre-leasing can make the lending process easier, however, if that becomes an issue, there’s always other kinds of loans such as mezzanine.

Can we all get along?! That is, how can your residents and retailers cohabitate? Devil is in the details. According to experts, the best way is to plan ahead and define the terms of the lease clearly to all parties. Make sure your tenants are aware of where they are living. Smells and noises can be an issue so a developer can bypass this matter by making sure not to take on any Ethnic foods as a tenant and ensure your ventilation system works! Hiring an acoustics specialist can also save you a lot of headaches down the line. As far as your retailers, they can’t complain if you pay for cleaning or CAM, you’re getting 90 units of residents, and there’s nothing like foot traffic for any retail business.

For more information regarding this topic or Opus Connect, contact Rebecca Pedooem at Rebecca@opusconnect.com