The massive market disruption and its impact on companies hasn’t fundamentally altered how Radnor-based NewSpring Capital looks at deals. In fact, in the early months of the pandemic and the ensuing shutdowns, Adam VeVerka, partner, business development, says the company was still closing deals and had others in diligence.
But the pandemic has given NewSpring Capital, and other buyers, some pause. Investments are still being made, but with a newfound perspective. For example, more attention is being paid to certain markets and consumer behaviors.
“I think there’s going to be a new set of behaviors and norms in terms of the way everyone does business, in the way consumers behave, as well," VeVerka says. “That will give us a different lens to look at this.”
Executing, however, is also expected to be a challenge as aspects such as underwriting and outlook are more difficult to discern given the uncertainty.
VeVerka spoke with the Smart Business Dealmakers Podcast about the state of dealmaking and what has buyers’ attention as they look for opportunities.
Listen to the full interview
Deal by deal
With businesses still in the grip of the pandemic, deals are best analyzed on a case-by-case basis.
“Every business is different,” VeVerka says. “Every deal is different, and even, I would say, certain asset classes within private markets are different.”
Market will be a factor because of how unevenly businesses have been affected by the pandemic. Businesses in the health care space, for instance, should continue to be a safer bet, as will other essential services. But given the difficulty buyers could have predicting the outlook for companies, some may choose to wait until the dust settles.
“Even with a good business, there’s an impact or consideration of what the new world will look like,” VeVerka says. “That, at least, should be considered into how you think about valuation.”
Dealing with constraints
There’s also the reality that buyers’ resources are strained by the disruption in the markets. On larger private equity deals, using a traditional leveraged buyout with quite a bit of debt, VeVerka says there’s pullback from what senior banks, and even private credit funds, are doing.
“Some have chosen to just put their pencils down and not invest right now because they have to focus on their portfolio, or their resources are constrained and that’s all the resources they have to do that,” VeVerka says. “So, you certainly are going to have less leverage, and that certainly translates to lower multiples at that end of the market.”
However, he says there’s generally no shortage of capital in the private markets. In fact, he says, there’s an overhang. He expects capital will find good deals, and those deals will get done.
Another factor to consider is the sellers’ perspective. In some cases, a company might have been hit so drastically that it won’t make sense for an entrepreneur to go out to market — at least, not for a while.
“If they’ve gotten to a point of cash flow breakeven or reduced their burn, if they can withstand and get through this, they’re better off, in many cases, to wait until they can start reinvesting in sales and marketing and either their burn rates get back to where they were or are at least on the right path, and then actually get paid for that,” VeVerka says. “So, you have different factors on both sides that are going to triangulate into a set of deals that will get done, certainly at less volumes than we’ve seen, but good deals will find a home.”