Lee Lloyd is a senior strategic advisor for M&A and financing transactions through his independent advisory firm, J. Lee Lloyd, LLC. He has over 30 years of professional experience in investment banking, business law and accounting. Mr. Lloyd was previously an investment banker with Goldman Sachs and an M&A/corporate attorney recognized in “The Best Lawyers in America.” He has advised clients on deals ranging from $5 million to $6 billion, including cross-border transactions in over 26 countries.
- In an effort to deploy capital, private equity firms and mezzanine funds are aggressively seeking out high-quality companies. As a result, companies of that caliber have numerous options for obtaining capital.
- Since the recession, investors and lenders have become more risk-averse, so lower quality companies have fewer options for obtaining capital.
- North Carolina companies currently are benefiting from readily available capital across all size and stage of maturity classifications.
- The increasing ease and accessibility of cross-border transactions is a major trend. These deals are now more viable because of technology, relationships and experience.
- Early-stage entrepreneurs should pursue external outreach activities to build their networks.
- Out-of-state investors often seek a local co-investor when pursuing early-stage deals.
- In the current M&A middle market, many entrepreneur-owned businesses are looking to grow through add-on acquisitions rather than harvest through exit transactions.
Q: How available is capital to middle market companies in your part of the country?
A: I spend approximately 50 percent of my time working on North Carolina deals and the other 50 percent on national and international work. In North Carolina, there is excellent availability of capital — ranging from senior debt to mezzanine capital to private equity — for larger-sized firms. North Carolina is home to several bank headquarters, so this region has access to substantial banking services and senior debt capital. Plus, North Carolina has a number of quality mezzanine funds. As we’ve come out of the recession, these mezzanine funds have retained a healthy investment pace. For companies with EBITDA of $5 million or greater, private equity is readily available. It is not difficult for a quality business in that size range to attract significant amounts of capital with relatively attractive terms.
Q: Is private equity coming from within North Carolina or from outside the state?
A: There are a handful of private equity firms in North Carolina, but most of the private equity is coming from outside the state. The private equity market is transferable across regions, and virtually all of the larger funds have hired business development officers whose job it is to travel across the country aggressively looking for deal flow. It’s a very competitive environment for these funds. A primary concern of these funds is not being able to deploy the capital that their limited partners have entrusted to them.
Q: Are there differences in capital availability for certain types of businesses?
A: While there are many avenues for high-quality companies to obtain capital, not all companies across the quality spectrum are seeing ready access to capital – especially since the 2008 financial crisis. Lower quality companies have a harder time finding capital than they did five or six years ago because of increased investor risk aversion. However, when compared to the attractive financing markets just prior to the recession, access to capital for high-quality companies is at least as good now and is often less expensive. Current interest rates are lower and private equity firms have to be more price-competitive to deploy their capital, so it is a better overall environment now for quality companies.
Q: What is the definition of a quality company that would have an easier time finding funding at a good cost?
A: High-quality companies have capable management and typically exhibit a cleaner balance sheet, modest levels of existing debt, good profitability and a fairly reliable growth rate.
Q: Are there particular industries that seem to be doing better than others at attracting capital?
A: In North Carolina there has been an abundance of deals in the health care sector. Contract research organizations have attracted a lot of attention from acquirers and the public equity markets. Over the last couple of years, North Carolina companies have seen a good number of IPOs. Larger private equity funds are investing across all industries and are funding add-on acquisition strategies. One of the strengths of North Carolina is the diversity of its industries – technology and health care in the Research Triangle, financial services in Charlotte and manufacturing in the Piedmont Triad.
Q: What kind of private equity is available?
A: The North Carolina region is fortunate to have capital availability across all size and stage classifications. Large private equity funds come to this region without hesitation, aggressively looking for deal opportunities. Mezzanine capital funds are flourishing in North Carolina.
Private equity for mature, lower middle market companies depends on the quality of the company. If the company generates EBITDA below $5 million, but has good margins and growth rates and a healthy balance sheet, it will generally be attractive to a number of smaller private equity firms.
For early-stage companies, there are venture capital firms in the Carolinas with excellent track records. There are also VC firms from outside the region who actively consider deals here, especially if they can find a regional co-investor. This region has also done a good job in recent years of establishing angel networks to make early-stage investments. These vibrant angel networks across the state increasingly work with each other to syndicate deals and assist each other with due diligence. Similar to entrepreneurial hotbeds across the country, North Carolina has a growing virtuous cycle of entrepreneurs who reinvest in promising new companies from the proceeds of their own successful exits.
Q: How would you compare North Carolina to the rest of the country and the world in terms of entrepreneurial activity and access to capital?
A: North Carolina companies often benefit from being outside the overcrowded areas like New York, Boston, Chicago and the West Coast, making it easier for quality companies to gain visibility. North Carolina has had a progressive business environment for many years, so many private equity funds have had success investing in North Carolina, have a positive outlook on the region and come back looking for more investment opportunities.
On a national level, almost every large private equity fund has invested in one or more companies in this region. It’s a good environment to grow a business and a great place to live. Labor is relatively inexpensive and capital is readily accessible. Additionally, development and expansion opportunities are available. These positive attributes help North Carolina attract top-level entrepreneurs and employees.
Internationally, the global capital markets are becoming much more efficient. Because of technology, relationships and experience, there are now active cross-border dealmakers on both sides of the Atlantic and Pacific Oceans. A major trend is the increasing ease and accessibility of cross-border M&A and financing transactions, which is expanding the available sources of capital for businesses in the Southeast.
Q: Is there anything additional that a business owner can do to make himself attractive to an investor?
A: Engaging in external outreach activities is crucial to increasing an entrepreneur’s network and visibility. For example, entrepreneurs could participate in business plan competitions, apply for “fastest growing companies” lists and submit for “entrepreneur-of-the-year” awards. Business development officers for capital providers are scouring those lists to determine which companies they are going to call on. The earlier the stage of the company, the more important it is to create external networks that will help when it is time to raise capital.
Q: Is there a difference in accessibility of smaller amounts of capital compared to larger amounts?
A: It’s easier to find larger amounts of capital, which is counter-intuitive to many people. The smaller the amount, the more likely it is that the groups that provide that level of funding have a preference for companies that are geographically closer to them. Many prefer to invest in companies that are within a half-day’s drive of their headquarters, which limits the universe of potential investors. When you’re chasing larger money, larger firms will travel because they have the staff and infrastructure to do so.
Q: Do out-of-state investors require a partner within the state?
A: The more mature the stage of the deal, the more likely investors are willing to go it alone. In early-stage deals, there is often a strong preference to have a regional co-investor that can keep a closer eye on the business. This is the biggest impediment to getting West Coast venture capital in the Southeast. Although there are many well-funded venture firms on the West Coast, they’re less active in our region because it’s harder for firms to give the companies the attention they need when they are far away.
Larger investors have enough funding to make the cross-country flights and travel to where there are good opportunities. Also, the larger firms can’t limit themselves to only their local region. They have to look aggressively across the country to fully deploy their capital.
Q: Do research institutions in North Carolina do a good job of commercializing their research?
A: The universities in North Carolina are becoming more aggressive and increasingly experienced in successfully commercializing their research. For example, the Research Triangle Park was a joint venture involving Duke University, the University of North Carolina at Chapel Hill and North Carolina State University. Other schools such as Wake Forest, UNC Charlotte, UNC Greensboro and North Carolina A&T State University are pursuing technology transfer and commercialization activities with their own research parks dedicated to housing those activities. There are now very specific commercialization strategies being pursued by most of the higher education institutions in North Carolina.
Q: Are there any other interesting trends that you would like to mention?
A: In the current M&A middle market, many entrepreneur-owned companies that typically might be expected to be looking for exit opportunities are instead more focused today on growing their businesses and looking for complementary add-on acquisition opportunities. I think that’s very interesting. The primary focus is on growing rather than harvesting, and many business owners are extending the time before they pursue an ultimate exit transaction. Many are growing organically or getting mezzanine capital to fund the growth. I am not seeing a large number of entrepreneurs seeking to exit in the near term, but private equity-owned companies have been active sellers and will likely continue to be. For entrepreneur-owned businesses specifically, many people who wanted to sell during the recession, but couldn’t, chose to sell in 2012. The years 2013 and 2014 have been less active for entrepreneur-owned businesses seeking to exit. However, in contrast, the volume of mega-sized mergers and acquisition transactions in 2014 is approaching record highs.
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