After the pandemic, there was a lot of discussion about getting back to normal, says Permanent Equity Chief Legal Officer Taylor Hall. However, the normal that led up to the pandemic in the M&A market actually might not be the best marker.

"Coming up to that period of time, we had a pretty sustained period of a very frothy M&A market," Hall said at the St. Louis Smart Business Dealmakers Conference. "Every year the question was, when's the music going to stop? You compare where we are now to that, and it doesn't look so great. Toss in there the fact that you've got obviously the inflationary market that we're living in, interest rates going high, uncertainty that whether it's actual or perceived that seems to precede an election every time, and you toss all those things together and it creates interesting circumstances."

Still, there's more private capital in the market than there's ever been, and people still have a mandate to put that capital to work. So, deals are still getting done. Though the situation with interest rates has made dealmakers less willing to take risk.

With all these factors at play as buyers try to ascertain whether a company's performance can be underwritten, there has come with it a tendency for mismatches between buyer and seller expectations.

"You've got sellers who are saying, coming up to the pandemic, people were getting this multiple or that multiple, and look at our performance over the last couple of years," Hall says. "And then you've got the buyers who are saying, well, yeah, but it's not quite the same now. That mismatch also created some hesitancy in the market. But I am hopeful that that's starting to be somewhat corrected. I don't believe it's stopping the number of transactions we're seeing, or opportunities; there's still plenty of it. And I would say that even in the depressed market over the course of the last couple, two, three years, strong-performing businesses with good management teams, strong balance sheets, they're still hitting it hard, and they are getting very high multiples, lots of competition. So, the short answer is it's all over the place."

In thinking about how to prioritize their time and opportunities in this environment, Hall says there has been a rise of more permanent capital, and the number of sources of capital has increased dramatically since the start of his 15-plus-year career. As an example, he says his firm has a base fund life of 27 years, which can then be extended up for additional three years.

"So, when we are looking at investing in a company, we're typically looking at with no intention to sell," he says. "We're wanting to hold that company for an indefinite period of time."

He says they're also forgoing the use of debt on transactions in part because of the types of businesses the firm looks at. Most of them are smaller, family run businesses that aren't familiar with how to live with financial covenants. And in building a long-term relationship, he says the last thing they want to do is to come in and drop that on them.

Still, despite the varying forces in the market, he says the firm is still looking for strong balance sheets and strong management teams that are willing to come along in a deal. However, those forces have necessitated the firm to look at businesses that may not traditionally have been within the scope of private equity.

"And that's happening all over the place," Hall says. "You're starting to see private equity go out into areas that they had not been traditionally, whether it's pest treatment, or whether it's rolling up carwashes."

His firm, he says, has had success with some acquisitions in the construction and specialty subcontractor space, which traditionally has not been a great space for private equity. That's something they're able to do in part because they have a longer-term focus.

Overall, he says there's a lot of private capital in the market and the competition for strong-performing businesses in the traditional auction strategy is really high.

"There's a number of deals where we've seen recently, we thought we made a really competitive offer, only to find out that we weren't even in the ballpark," Hall says. "And so, you're always looking for that next opportunity; that edge."