2019 Highlights and 2020 Outlook Impacting Private Equity

HOST: Hello and welcome to Cherry Bekaert's podcast series for private equity, where we discuss challenges and opportunities in the ever-changing investment environment.

HOST: Today, we are joined by Jeff Bankson, a principal and national leader of Cherry Bekaert's Transaction Advisory Group. Jeff will discuss a few trends he's seen in the industry, including overall economic activity and how that's impacting the private equity environment, as well as what's in store for 2020.

HOST: Welcome, Jeff.

JEFF BANKSON: Thank you. Glad to be here.

HOST: The first part of last year, there seemed to be some uncertainty in the market with fears of a recession. How did that impact deal flow and what industries, if any, were impacted?

JEFF BANKSON: There are always fears of a recession after a long bull market. There was volatility at the end of 2018, with the market dropping to about 22,000 from earlier highs in the 26,000 to 27,000 range, so there were definitely concerns.

JEFF BANKSON: Overall, the economic fundamentals remained strong: low interest rates, low unemployment, low inflation, and positive GDP growth. Those who believed in those fundamentals were rewarded on both the debt and equity sides.

JEFF BANKSON: In the first quarter of 2019, both debt and equity markets improved, and the Dow Jones Industrial Average was back in the 26,000 range by early March.

HOST: As 2019 drew to a close, there seemed to be more optimism in the market and a great deal of cash available. What do you think is driving this confidence, and will this change the number of deals and how deals are being done in 2020?

JEFF BANKSON: Private equity firms were sitting on about $1.5 trillion of cash at the end of 2019, which suggests 2020 would see significant deal volume. Investors are moving into private equity because of lower interest rates and lower expected returns from public markets.

JEFF BANKSON: That means more competition for deals, which should push up prices and could pressure overall returns. At Cherry Bekaert, we primarily operate in the middle market, which I think is less impacted, so our deal volume should be consistent with 2019.

JEFF BANKSON: A lot depends on where a private equity fund is in its cycle. Funds in fundraising mode generally do fewer deals, while those in capital deployment mode try to move money and complete transactions, which increases volume.

HOST: 2020 is an election year and there are other unknowns such as the U.S.–China trade war and Middle East instability. What kinds of challenges or opportunities could this bring to the private equity sector?

JEFF BANKSON: The impact is industry-specific. Industries affected by the trade war and tariffs, such as steel or automotive, will likely face challenges on both the buy and sell sides. However, given the large flow of money into private equity and other alternative investments, I expect 2020 to be at least consistent with 2019, if not better.

HOST: Cybersecurity continues to be a global threat. How is this affecting deals and the kind of due diligence now involved?

JEFF BANKSON: I've been doing this work for more than 25 years. Over the last five years, cyber due diligence has evolved from an occasional check to an essential part of every deal.

JEFF BANKSON: Some of our clients experienced breaches this year. Cherry Bekaert has a cyber due diligence group that performs cyber gap assessments for private equity clients and evaluates insurance coverage to ensure clients are properly protected against cyber attacks.

HOST: Let's talk about debt capital and the economics and financing to get deals done in 2020. What are your thoughts?

JEFF BANKSON: There's plenty of debt and equity capital in the market. With $1.5 trillion available, financing is accessible. On a typical 12x purchase-price multiple on EV/EBITDA, you can get six times debt financing on quality deals without significant effort.

JEFF BANKSON: On larger private equity deals where a firm is writing a larger equity check, the debt covenants have been attractive. A typical debt deal might have three or four covenants, while some higher-end deals have as few as one leverage covenant.

HOST: What is your prediction for the industry over the next 12 months?

JEFF BANKSON: The economy is strong, interest rates are low, and cash is available. I expect 2020 to be as strong as 2019, if not marginally better.

HOST: Thanks for your time, Jeff. We appreciate your insight as we head into 2020.

HOST: For additional information, please visit our website at cbh.com or contact Jeff directly at 301-951-3636.

JEFF BANKSON: Thank you.

HOST: Thank you.