Melinda Davis Lux is an M&A partner and leader of the corporate practice group for Wyche, P.A., a South Carolina law firm. Ms. Davis Lux focuses her practice on mergers and acquisitions, joint ventures, and financing transactions.
- It is a seller’s market in South Carolina for profitable middle-market companies seeking capital. The challenge for these companies is not becoming more attractive to investors, but becoming more visible to them.
- Many out-of-state PE firms are active in South Carolina, and this is one of the biggest drivers of M&A activity.
- In addition, South Carolina companies are buying businesses in other regions of the U.S. and bringing the acquired company’s headquarters to South Carolina, which is also driving economic activity.
- Manufacturing remains a staple in South Carolina’s economy and this sector is active in the M&A market, as are the distribution, healthcare, advanced materials, aerospace and technology sectors.
- As PE firms migrate downstream towards lower middle-market companies, there is increased competition for local investors who want to buy small companies.
Q: What is your opinion regarding access to capital in South Carolina?
A: I work primarily in the M&A space with established companies, and I am finding that capital is becoming more readily available than it has been in prior years for profitable established companies. On the debt financing side, banks are very competitive. They are offering attractive terms to middle-market companies for traditional lines of credit. On the equity financing side, it’s even more competitive for profitable middle-market companies, particularly for those looking for an exit event. The PE firms are active in South Carolina because they have so much money to invest.
Q: Why is there so much capital available in South Carolina?
A: We have some good local PE firms that are acquiring targets in-state and out-of-state. Also, PE firms outside of South Carolina are bringing large amounts of capital to the state.
Q: What is causing out-of-state investors to take a closer look at South Carolina middle market companies?
A: Investors are increasingly looking for opportunities in South Carolina because we have a lot of profitable, lower middle-market companies. With the large amount of capital they have, PE firms are looking for add-on acquisitions for their platform companies. For add-on acquisitions, PE firms are willing to look more down the market, which is where many of our companies are.
Q: Are there many PE firms in South Carolina?
A: There are just a handful of PE firms in the state. That activity is growing in the sense that there are smaller groups getting together to create funds. It’s very promising that we are seeing the local PE firms growing their portfolio companies, profiting from their sale and keeping the money here by reinvesting in South Carolina. However, the more significant activity is with out-of-state PE firms coming to South Carolina, which is having a greater effect on driving M&A activity
Q: What companies are most attractive to PE firms?
A: We see a lot of activity with manufacturing and distribution, healthcare, advanced materials, aerospace and technology companies.
Q: It’s interesting that manufacturing is strong in South Carolina. It’s not the case in other parts of the South. Why is that?
A: There’s a long history of manufacturing in South Carolina. It’s less visible now because it is more automated and therefore employs fewer people, but it is still a staple part of our economy.
Q: Do you work with companies outside of South Carolina?
A: I work mostly with South Carolina-based companies and PE firms outside of the state looking to invest in South Carolina companies. One thing that is overlooked, I think, is that we have a lot of outbound M&A activity in South Carolina. That is, there are large companies headquartered here that are active in the M&A market as acquirers, and they typically acquire out-of-state targets, which is great for economic activity here. Generally, these outbound deals are under the manufacturing umbrella.
Q: Do you have a sense of how South Carolina compares to the rest of the South in terms of M&A activity and access to capital?
A: One thing that’s challenging for middle-market companies in South Carolina is making themselves visible to PE firms, most of which are out-of-state, and strategic buyers. We have some locally based PE firms and investment banking firms, we just don’t have as many M&A intermediaries as other areas, which makes companies harder to find. That’s why it’s helpful for FourBridges to spend time in South Carolina. They are creating opportunities by letting companies know about the opportunities in mergers and acquisitions.
Q: What could these middle-market companies do to make themselves more attractive to investors?
A: For middle-market companies in South Carolina, the main challenge is not to make themselves more attractive, but to make themselves more visible, particularly to out-of-state PE firms.
Q: What is South Carolina’s state government doing to encourage access to capital, job growth and business growth?
A: There has been a lot of attention in recent years on encouraging entrepreneurial activity and funding startup companies, which is critically important. The state would benefit from placing a similar focus on middle market companies. I think we can do this by encouraging PE firms and M&A intermediaries to be more active in our market.
Q: What is your sense of the proportion of strategic buyers vs. investors?
A: South Carolina likely follows the national trend, where more M&A activity today compared to 10 years ago is PE-driven. The proportion of PE activity as compared to overall M&A activity is certainly increasing.
Q: Do your comments apply to the whole state?
A: My comments are generally true across the state but certainly applicable in the Upstate. The markets are slightly different around the coast because of tourism-related M&A activity.
Q: What does local investment look like in South Carolina?
A: In the M&A markets, we have many local investors who want to buy middle market companies. Those local buyers are important to the economy but may be having a harder time finding companies because PE firms are squeezing out smaller investors and management buyout activity as they move to the lower middle markets. Therefore, there is increased competition as PE firms move downstream. Over the past several years, we are increasingly getting calls from both investors and PE firms that are trying to identify middle market companies to buy.
Q: What’s fueling the availability of debt?
A: In terms of traditional bank debt, highly profitable middle-market companies are receiving aggressive offers from multiple lenders and can negotiate to get better credit terms. Most of the bank debt we see is from regional banks in the lower middle market.
Q: What obstacles stand in the way of M&A deals in South Carolina
A: It’s a seller’s market right now, so rather than deals completely falling apart when an issue comes up, there’s more likely to be a renegotiation of the purchase price and deal terms. If a deal does fall through, it’s usually early in the process during due diligence, when the potential acquirer learns something key to the business is different than expected. Also, there are always potential sellers, particularly closely held companies in the middle markets, who are reluctant to sell even when M&A markets are favorable.
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