Rainier Group | A Look Back and the Year Ahead
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A Look Back and the Year Ahead

Newsletter

A Look Back and the Year Ahead

Before we jump into 2018, we want to reflect on the past year in the economy and how it impacted businesses and owners. We’ll then take a look ahead at where things are going and what we might expect.

The past year continued to provide good conditions for US businesses across industries. Major economic indicators, like the Business Sentiment Index and the Industrial Production Index, grew from the previous year indicating continued expansion in the economy and a positive outlook among industries. So, how has this impacted businesses and owners?

  • More capital for reinvestment, personal gain, or both.
  • Put growth/expansion strategies on, or back on, the table.
  • Expanded options/opportunities for exit strategies.

These conditions were not new to 2017, and for business owners, the past few years have presented a lot of options regarding “what’s next” for them and their business.

Looking specifically at M&A activity, the past few years have been ripe with opportunity due to easy access to capital for investors and rising valuations. But, there was a bit of a shift this past year.

Chart

In 2017, deal size increased by about 67% over 2016 values, but the total number of deals came down significantly. 2017 also saw the highest ever involvement of private equity (PE) and venture capital (VC) firms as sell-side investors (PE/VC exits, about 31% of all deals). What’s driving this change?

  1. Investors looking to round-out their investment platform and paying large premiums to do so.
    • Add-on investments secured higher premiums than new platform investments – indicating a rush to consolidate industries and finalize platforms.
    • This bodes well for companies in “hot” industries and they should expect continued higher multiples through 2018.
  2. Investors have already satisfied their appetite for acquisitions.
  3. Apprehension of new tax law and healthcare reform likely slowed both buyers and sellers.
  4. PE firms are liquidating the investments of roughly 4-7 years ago (consistent with the average divestment period for PE firms).

With all that said, where do things go from here?

The year Ahead… More of the same?

With the way everything is trending, it seems as though 2018 will be a mix of more of the same (strong performance) from last year and a more pronounced slowing of the momentum we’ve enjoyed. Business and consumer confidence is still high, new tax reform takes effect (to what effect, not yet sure), and there is still an appetite to grow and expand.

For the year ahead, we expect a similar number of deals as 2017 at continued elevated valuations, the biggest question is for how long? The signs:

  1. CEO confidence continues to increase (traditionally a positive indicator of M&A activity)
  2. As always, we can expect premium valuations for:
    • Above-average financial performance
    • Trailing Twelve Month (TTM) EBITDA margins and revenue growth 10+% (or one at 12+ and the other at 8+%)
    • Senior management continuation through/post acquisition
  3. Supportive financial conditions, booming US equity markets, and strong business and consumer confidence continue to contribute to the strong M&A market.

What we will be keeping an eye on this year are businesses’ and consumers’ sensitivity to change. Topics that can put downward pressure on the current state:

  • Rise in interest rates
  • Economic nationalism and protectionism
  • Restrictions on global trade
  • Cross-border economic integration

Even without extreme changes to the points above, at some point, this “up” cycle we have been riding will change directions. The severity or impact of a correction is hard to predict; however, we are confident it will not be the doom and gloom that we’ve seen in our recent past. The only thing we can do is be mindful of the fact that it will happen and try to stay ahead of it.