Earlier this year, Petra Capital Partners completed fundraising on its Petra Growth Fund IV, giving the firm $208 million of capital to invest in its target of lower-middle-market health care and tech-enabled services companies. Partner David Fitzgerald says the investment progress has been good even though it’s meant investing in a unprecedented environment.

“The pandemic has been both an opportunity and a challenge at different times,” he says. “We're trying to invest in four or five high-quality deals per year. We're not focused on volume as much as we are the quality of the investment opportunities. So, we're fairly disciplined and take our time to find the right deals.”

Despite facing economic headwinds, dealmakers have often pointed to the high amounts of dry powder available to investors. Fitzgerald says on the fundraising side, it's been a very robust time for general partners to try to raise capital from limited partners who are looking for alternative assets. However, there are challenges.

“When we try to build out our portfolio and find high-quality management teams to invest in, certainly been a challenge because of the dry powder in the marketplace and how much total capital is out there trying to find deals. So, you have a lot of money chasing probably a smaller number of high-quality deals, which creates an uplift in valuation and that's where you have to, as an investor, maintain your discipline not to over pay when you shouldn't but also to know what the real quality companies are and when to stretch to really buy into a quality business.”

And because there's so much capital available in the market, there's now greater value in what an investment team brings to the table beyond funding. Fitzgerald says what his firm has tried to do is be more than just a capital partner by getting involved in customer introductions, opening a door for prospective companies with a client or a contract that they're trying to land. They also help with recruiting and building out a management team if there's a gap while also serving as an outsource business development arm to help with evaluating mergers and acquisitions.

Interest rates rising is significant, he says, even though by historical standards, the rate remains low. Still, it’s bound to have an impact on the M&A math.

“I think that it'll reduce the spread that traditional lenders, banks, make on their loans,” he says. “Where Petra invests in the debt structure, we've always been able to maintain what we think is a fair interest rate for companies at the stage that we're investing, which are lower middle-market companies that typically don't have a lot of access to bank financing. So, I think it will have an impact. I don't think it's going to go to a level like we saw after the 2008 financial crisis where the bank's just pulled back lending entirely because there was structural dislocation in the credit markets. I don't think it'll be that. I just think it'll be a gradual tightening of credit, which should impact the velocity of deals and valuations.”

Fitzgerald spoke on The Smart Business Dealmakers Podcast about how raising capital and investment decisions are being affected by conditions in the market. Hit play to catch the full conversation.