First Annual Market Expectations Survey

A look at what investors, business owners and their advisors see in the year ahead for mergers & acquisitions in the South. 

Presented here are highlights from the first annual Investment Banking South Survey, in which we ask investors, business owners and their advisors to look back to 2014 and forward to 2015 in order to give us a sense of where the merger & acquisition market in the South is today and where it is going.

Conducted in April 2015, this survey was completed by 338 investors, business owners and business advisors – such as attorneys, accountants and bankers – from Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee.

As we note in the first paragraph, this will be an annual survey, with the results of each year building on the previous year, so that we can identify trends and patterns over time that may shed further light on the evolution of the middle market in the South.

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Capital Looking For a Home in Charleston, South Carolina: An Interview with Bobby Pearce

Bobby Pearce is an attorney with Smith Moore Leatherwood and the co-managing partner of the firm’s Charleston office. His practice includes mergers and acquisitions, corporate law, private securities offerings and shareholder disputes.

Pearce has an entrepreneurial background, having started or invested in multiple companies, and since 1984, he’s spent a great deal of time working on economic development initiatives for the state of South Carolina and the Charleston area.

Key Takeaways:

  • There is a broad chasm in South Carolina between investors with money and companies seeking to raise funds. With a shortage of mid-market companies that have the longer-term, proven track record that most investors are seeking, capital often is being left sitting on the sidelines.
  • Established companies, especially with EBITDA of $2 million and above, now have many more options for capital.
  • Charleston is on a fast growth track with its commercial and industrial base of companies; the number of home-grown and recruited successful, mid-market companies is expected to grow exponentially over the coming years.
  • The snowballing growth of mid-market companies in this region will lead to many more successful exits and then much more capital being reinvested into new companies in the Lowcountry of South Carolina, creating a self-fulfilling cycle of formation, growth and corporate and investor success.
  • Tech-savvy and creative millennials are migrating to Charleston at a rapidly accelerating rate because of its livability, coastal amenities, historic charm and now high-impact work opportunities. The region is one of the top 17 fastest-growing metro areas in the U.S. and is experiencing some growing pains, having to explore infrastructure options to better accommodate the increasing influx of people and businesses.
  • Boeing’s new multi-billion dollar aircraft manufacturing and assembly plant here has spurred an explosive growth of investment in the Charleston region’s aerospace and aviation cluster. Daimler just announced its plans to grow the region’s automotive cluster by building a Sprinter plant, which will complement the already-existing defense, tourism and health care industry clusters.
  • South Carolina’s highly-integrated, 16-campus technical education college system has greatly helped to attract Boeing and other companies to the state and the region. This system offers unparalleled industry-specific training and education and thus provides a steady stream of well-trained, qualified employees, which most other states cannot provide.

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Local Investment Driving Memphis’ Diverse and Growing Market: An Interview with Matt Heiter

Matt Heiter is a shareholder at Baker Donelson in Memphis, Tenn. He focuses his practice on public and private securities offerings, mergers and acquisitions, corporate governance and business planning.

Key Takeaways:

  • Companies in Memphis garner capital from a strong local market of investors, as well as eager firms from outside the state.
  • Tennessee government has effectively marketed the state’s attractive business environment, encouraging a steady stream of out-of-state money.
  • The pent-up supply of cash from the recession and a general confidence in the economy has created a robust capital market.
  • In addition to strong financials, companies should focus on their management team when seeking investors.
  • Tennessee’s emphasis on start-ups has increased access to capital for companies of all sizes.

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Growing the Tech Economy in the Southeast: An Interview with Bob Crutchfield

Bob Crutchfield is a general partner with Harbert Venture Partners, an institutional capital firm located in Birmingham, AL and Richmond, VA. Harbert Venture Partners invests in emerging technology and healthcare companies in the Southeast, mid-Atlantic and Texas. Bob has launched five successful new business ventures and has led four M&A transactions during his career.

Key Takeaways:

  • Serious tech economies require a cohesive economic development model, combining private and public capital to provide predictable funding to fuel the early growth needs of startups.
  • A coordinated partnership between public and private organizations is necessary to commercialize the innovative technology being produced in Southern universities.
  • Government dollars, in the form of non-return on invested capital or technology-based economic development site prep, are most needed for seed funding of high growth companies.
  • State money relies on private intelligence. Therefore, if private entities allocate portions of their budgets towards seed-stage companies, it’s likely that state funding will follow.
  • Tech development is not a short-term process. Government funding vehicles are needed to maintain a level of continuity, and private funders can help facilitate funding predictability by smoothing out the disruptions that can result from political changes.
  • Investment should be paired with the organizational structure and management expertise that private industries provide for early stage companies to accelerate their commercialization time horizons.

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Government & Economic Incentives: An Interview with Stewart McMichael

Based in Tennessee, Stewart is an expert and consultant on government and economic incentives. Having worked as an engineer, Wall Street tax attorney, fund manager and business owner, Stewart has a unique perspective on how small and mid-market businesses can maximize the use of incentives to help reach their goals. Currently, Stewart is working with FourBridges Capital Advisors to advise businesses on how to best integrate traditional forms of financing with all forms of incentives.

Key Takeaways:

  • Incentives (offered by federal, state, city and county governments, and some utilities) are readily available and can be highly effective. However, in many cases, they are underutilized.
  • With respect to any business within its taxing jurisdiction, the government effectively acts as a passive partner with a financial interest in the net profits of the business. Through this partnership, the government offers incentives as a way to foster the growth and prosperity of the business, reducing costs or providing it access to cheaper capital, property, infrastructure and job support.
  • In the Southeast, just at state and local levels, billions of dollars of incentives are offered each year to businesses of all sizes across most industries. Incentives can play a vital role in a business’s capital structure and should be considered as an alternative or complement to other types of capital.

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North Carolina Adds On: An Interview with Lee Lloyd on M&A Trends and Financing the Growth of High-Quality Companies

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.

Key Takeaways:

  • 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.

Continue reading North Carolina Adds On: An Interview with Lee Lloyd on M&A Trends and Financing the Growth of High-Quality Companies

A Seller’s Market in South Carolina: An Interview with Melinda Davis Lux

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.

Key Takeaways:

  • 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.

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Angel Investors Breathe Life Into Alabama Businesses: An Interview with Richard Marsden

Mr. Marsden is an attorney at Lanier Ford in Huntsville, AL. His practice is concentrated in the areas of corporate law, securities, and technology. He advises clients entering into private equity transactions and assists them in negotiations with venture capitalists.

Key Takeaways:

  • Middle-market Alabama companies in the $10 million to $50 million range can have a difficult time finding capital.
  • Bank inactivity has forced underserved middle-market companies to look for opportunities in private debt.
  • Organizations like the Huntsville Angel Network provide structure and efficiency to the investment process so that those looking to invest make well-informed strategic decisions with their money.
  • For companies above $50 million on the acquisition side, most capital comes from out-of-state.
  • State and local governments should create incentives for retaining top talent.
  • A diverse management team and a strong board of directors make a company more attractive to investors.

Continue reading Angel Investors Breathe Life Into Alabama Businesses: An Interview with Richard Marsden

Tech Companies Attracting Out-of-Region Investors to North Carolina: An Interview with David Jones

Mr. Jones is co-founder of Bull City Venture Partners in Durham, NC, and partner of Southern Capitol Ventures in Raleigh, NC. He previously co-founded and served as the Chief Technology Officer of Orthocopia.com.

Key Takeaways:

  • In today’s market, growth is one of the greatest definers of value. Consequently, private equity groups are competing to invest in tech companies because they are fast growing, require relatively little upfront capital and offer the potential for a quicker return.
  • Traditional tech centers like San Francisco, New York and Boston are investing outside their region because markets are overcrowded and value can be found in innovative companies in areas like the South.
  • The startup market is gaining strength because successful entrepreneurs who have sold their businesses are choosing to reinvest in their local communities by funding early stage companies.
  • Industries that have a binary outcome – meaning they are either approved or not, like biotech – are becoming less attractive to investors. Meanwhile, hardware companies like 3D printing are gaining traction.
  • Companies should seek to build relationships with funders long before they think they need the money. By engaging funders in the business early on, companies position themselves to call on them when the time is right.

Continue reading Tech Companies Attracting Out-of-Region Investors to North Carolina: An Interview with David Jones

Early Stage Funding Growing in Tennessee, Middle Market Access More Difficult: An Interview with Commissioner Hagerty

Commissioner Bill Hagerty leads the Tennessee Department of Economic and Community Development, Nashville, TN.

Key Takeaways:

  • It is more difficult than it should be for middle market businesses to access growth capital, but early stage capital is becoming more available, especially in Tennessee. In addition to providing funding, early stage investors help entrepreneurs create a logical and disciplined capital structure that makes it easier to attract follow-on funding.
  • Obstacles to greater access to capital in Tennessee include the need for stronger links between research institutions and entrepreneurs, loss of major banks and a growing appetite for more direct flights from capital centers.
  • At the same time, Tennessee and the South benefit from the current low interest rate environment nationwide, which drives the current frothiness of corporate debt markets. This easy money environment has driven valuations higher as investors seek equity returns. With valuation multiples more reasonably valued in the South, disciplined investors are becoming increasingly interested in the area
  • Capital deployed in the South is made more efficient via a more business-friendly tax and regulatory environment that keeps more capital in the business working toward future growth.
  • Tennessee is benefiting from the states’ efforts to increase entrepreneurial activity and attract capital, including helping out-of-state private equity groups partner with local investors, which is key.

Continue reading Early Stage Funding Growing in Tennessee, Middle Market Access More Difficult: An Interview with Commissioner Hagerty