Dealmaker Insights

Reed Smith

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Dealmaker Insights

Reed Smith transactional lawyers delve into the latest themes affecting the corporate world and provide perspectives into the legal and commercial considerations impacting how transactions get done. Their insights will help you navigate the complexities of deal-making across industries around the globe.

18H AGO

Private Equity Spotlight: Cautious optimism – trends and challenges in health care private equity

This episode features a panel discussion on how evolving regulations, shifting market dynamics, and operational challenges are reshaping the health care private equity landscape. Panelists express cautious optimism for increased deal activity in the latter half of 2025, while acknowledging ongoing regulatory and market uncertainties. The discussion was moderated by Chris Sheaffer, global vice-chair of Reed Smith’s Private Equity Group. Panelists included Charles Simon, director at Stifel; Brandon Cohen, principal at H.I.G. Capital; Adam Boorstein, vice president at InTandem Capital Partners; and Nicole Aiken-Shaban, partner with Reed Smith’s Health Care and Life Sciences Groups.

31 min
APR 30

Private Equity Spotlight: A conversation with Thomas Weinmann of REIA Capital

In this episode of our Private Equity Spotlight series, Reed Smith partner Nik von Jacobs is joined by Thomas Weinmann, Managing Partner at REIA Capital, for an insightful conversation about his work and the intricacies of the fund of funds model. ----more---- Transcript: Intro: Hello, and welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content, please contact our speakers. Nik: Hello, everyone. I'm Nik Van Jacobs, private equity partner at the Munich office of Reed Smith. And today I'm welcoming to our Dealmaker Insights series, Thomas Weinmann from REIA Capital. Welcome, Thomas. Thomas: Hi, Nik. Great to see you again or talk to you again on a podcast. Nik: Once more, it's great to have you with us, Thomas. Tell me, who is REIA Capital? Thomas: So we are basically a fund of fund advisors. We manage money from private individuals and small endowments, small pension funds, and ultimately we invest the money in private equity funds. And our speciality is basically we focus on small cap private equity funds, not on the big names, on the real small names, unknown names, but on the ones who have a better performance. Nik: That's fantastic. And I know you're very active in Europe since a long time. And today, given that we're focusing on the U.S. I think it's worthwhile that you also have a reach out to the U.S. and I'm looking forward to hearing on that. Thomas: Yes. Actually, we have been in Europe with our model for more than 10 years. I'm personally, I'm in the private equity space for more than 25 years. Now, we now move to the U.S. with a partner because we actually want to invest our own money plus the money of our investors in the U.S. to get more and better diversification into our portfolios. Nik: Interesting. And I think you just teamed up with the U.S. likewise fund of fund. Tell me about what that is like, who it is, what's the background, and what your search was like. Thomas: Yeah. Actually, their background is quite similar to ours. The people who are working there, they've been in private equity funds before, spent more than 10 years in PE funds, and then decided to basically start a fund-to-fund business. They initially did it through a multifamily approach, so a family office approach. So it was not that they started just as a classical fund-to-fund. And they, in a way, yeah, I think I would more call it we are a copy of them more, not knowing when we founded ourselves because they operate in the same manner, coming from PE, doing a very deep due diligence, only focus on small cap, and they only do it for their clients from the U.S. In the U.S. market. And we've done the same, but on the European side, so other side of the Atlantic. Now we join forces. They help us to get access to good U.S. funds. And yeah, let's wait and see what might even develop in the future. Nik: That's interesting. And where do you see the comparisons and the overlaps in terms of, well, let's say the market, the investment approach, and the process of holding those portfolio companies? Thomas: It's actually quite interesting. If you look at the small end of the spectrum, so in small cap in Europe and the US, you ultimately see that fund managers have the same approach, which sounds a little bit strange. They try to find smaller businesses. They often only buy, let's say, a small majority, and a large minority is still with the previous owners. They look into operational improvements. They do a lot of M&A or add-on acquisitions. And then they often sell the businesses to larger funds or strategic buyers. And that's something we see on both sides of the Atlantic. When you look into the return expectations, pretty similar. When you look into the real returns achieved in the past on these sort of models. Similar, where are really differences? The US market is slightly larger than the European market. I would say in the US, you have roughly 50% more fund managers. So we are more towards 18 to 19, perhaps even 100 or 2000. In Europe, we are more towards 1,200 fund managers in that size bracket. So you have to dig a little bit deeper because there's more to be digged through. And the other thing is, in Europe, often we see fund managers who are getting larger tend to become more management fee driven. In the U.S., you have that also sometimes, but the very good funds often also stay smaller on purpose. So it's much more difficult if they stay smaller to get access to them if they have a stable investor base. So you need more of an entry ticket into the funds, which is less the issue in Europe. Nik: Interesting. And in terms of the market, in terms of the assets you see, would you say there's a huge difference? Thomas: No. In reality, not really. It sounds strange. I think what you might have in some areas, you might have more assets in Europe than the U.S., for example, for manufacturing businesses. But that's also a regional thing. business services, you see a lot in the US. You might more regularly see financial service business models in the portfolio of private equity funds, less the case in Europe. But really, if you go to the bottom, it's pretty similar. It's a similar model and similar return expectations. So the good question is, why do you still go there? I think overall, on a long-term period, it's similar. But if you look in certain, let's say, timeframes, certain vintages, it might be that there's the U.S. A little bit more positive on the optics and then other times when European fund managers showing better returns for a short period of time. And if you want to have a good diversification, you should not leave out the one or the other. Nik: That's interesting. And does the market, sort of the size of the local home market, play a big difference? Does it make a difference? I mean, if you look at Europe with those various jurisdictions, various regulations, etc., are there more sort of operational costs attached to that or does that level out? Thomas: No, I think on a smaller spectrum, businesses are often very local. So in Europe, you have, of course, the borders and the languages and legal systems which are different which creates some let's say a separation of fund managers and their approaches in the US I would say often the small cap funds focus on a local area as well so they do not go all over the US to buy assets because it's just too expensive from a logistic point of view so if you're based in Chicago you regularly focus on the area in Illinois, and you just don't often go to California just to buy assets. It's just easier to do it locally, and you have sufficient number of investment possibilities also. So in this respect, I would even say it's pretty similar, but in the U.S., you have a bigger market in respect of you have not these language barriers. So you have English and Spanish, I would say. In Europe, you have many more languages. And then I think on the legal barriers, they are lower in the U.S. than in Europe. Nik: Interesting. And tell me, do you also sort of have specific sector focuses in terms of where you invest or are you very open and let it play out? Thomas: We operate a fund-to-fund model. And as we don't have the crystal ball in front of us, and we're investing over the next 10, 11 years when we do a commitment, we ultimately need to diversify. So, I think it would not be a wise decision just to go into healthcare only or in tech or business services. But what we do is we try to pick fund managers, and that's irrespective if you're talking about the U.S. or Europe. We try to pick fund managers with a sector specialization. Because very often that sector specialization is a USP. We try to find people who do something much better than, let's say, journalists. And that's where we see basically an upside, better returns, but it also helps us to diversify within our portfolio. So we want to have business services, we want to have healthcare, we want to have tech. And what helps us, if the fund managers have a clear-cut view on their industries they want to invest in and have a USP, how they basically, for example, source businesses, how they help the businesses to grow faster. If you have such a situation, then we can actively build a portfolio, which helps us to get a diversified investment for our investors and ourselves. Nik: Great. Looking at such funds, in how many funds does one of your funds then basically, or together with your partner, do you invest? And what sort of might be roughly ticket size, which you invest? And finally, what assets, in terms of the bracket, what is sort of the asset class or the range of sweet part, if you like, of those funds investing into individual assets? Thomas: There we have a slight difference. In Europe, we target to invest in 10 private equity funds out of a single product. And it ranges, the investments ranges between seven and a half to even going up to 15 million euros. And that's based on the 100 million target size we have for our fund. In the US, the target size is slightly smaller. We only want to achieve $75 million dollars for our fund there we're gonna have 20 percent of our investments in co-investments because we get the co-investments alongside our partner and therefore it's it's reasonable to do that we want to do five two to ten co-investments so basically two to four percent of the fund of each fund from our end goes into co-investments and the remaining remainder so the 80 percent goes into seven, perhaps max 10 funds there. So the diversification is a little bit smaller, but in reality, we end up somewhere between 80 and 100, 110 companies, realistically. Nik: That's a great diversification for your investors then. Thomas: Yes, yes. And it's not too diversified, but also not too, let's say,

31 min
MAR 25

Private Equity Spotlight: Impact of corporate criminal liability changes

In this episode of our Private Equity Spotlight series, we explore what the UK Economic Crime and Corporate Transparency Act means for those in the private equity industry. We focus in particular on the “failure to prevent fraud” offense introduced by this Act. Our speakers will talk you through which companies will be liable and explore how they can defend themselves against regulatory action. Private equity partner Tom Whelan is joined by Reed Smith regulatory and investigations partners Rosanne Kay and Ali Ishaq, as well as former Reed Smith partner Patrick Rappo, to share practical insights and tips in this edition of our series. ----more---- Transcript: Intro: Hello, and welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content, please contact our speakers. Tom: Hi, everyone, and welcome back to Dealmaker Insights. I'm Tom Whelan, a partner in Reed Smith's private equity group in London. I'm joined today by Roseanne Kay, Patrick Rappo and Ali Ishaq. Before we dive in, I'll let them briefly introduce themselves. Roseanne. Rosanne: Hi everyone, I'm Roseanne Kay. I am a partner in Reed Smith's London office, specialising in white-collar crime. I focus on financial services litigation also. Tom: Patrick. Patrick: I'm Patrick Rappo, formerly headed up the Bribery and Corruption Divisions at the UK Serious fraud office and advise some members of the House of Lords in relation to the legislation that we're going to be talking about today. Tom: Excellent. Ali. Ali: Hi, Tom. I'm a partner in the firm's London office, and my practice focuses on regulatory investigations and enforcement proceedings, profane claims, and also general commercial litigation and arbitration. Tom: Great. Thank you all. Well, today we'll be discussing what the Economic Crime and Corporate Transparency Act means for the private equity industry, with a special focus on the failure to prevent fraud offence. There's a lot to cover, so let's jump right in. Ali, why are the two new corporate criminal offences relevant to private equity and their portfolio companies? Namely liability for failing to prevent fraud by associated persons and liability for senior managers who commit economic crimes. Ali: Thanks, Tom. So this is a new UK offence, which is the failure to prevent fraud offence, which is coming into force in September 2025. It was brought into the UK statute books together with a new senior manager offence, which came into force in December 2023, and which I'm going to touch on very briefly and to begin with. Now, both of these new corporate offenses are part of the UK government's plan to make it easier to find corporates criminally liable. Starting very briefly then with the senior manager offense. This new offense makes corporates criminally liable for the actions of their senior managers acting within the actual or apparent scope of their authority who commit economic crimes. It is also going to apply to private equity companies, and like the failure to prevent fraud offense, has a wide extraterritorial effect. Now, a senior manager is defined as someone who plays a significant role in making decisions about how all or a substantial part of the organization's activities are to be managed or organized, or in actually managing or organizing a whole or substantial part of those activities. Now, the applicable economic crimes which a senior manager can commit and therefore make the company liable for are broad in range and include offenses such as cheating the public revenue, false accounting, money laundering, bribery or fraud, and even sanctions violations. So that very briefly was the senior manager offense. Moving on then to the failure to prevent fraud offense. Now, this offense is important to private equity firms and their portfolio companies for two key reasons. The first reason being, in very simple terms, that the failure to prevent fraud offense can hold a private equity company liable for fraudulent actions committed by associated persons if it can be shown that the private equity company or its clients benefited from that fraudulent act. These associated persons whose actions can create liability include employees and most notably both portfolio companies and even the GP. And adding to this concern is the fact that the failure to prevent fraud offenses is broad in nature. It covers a range of fraud offenses from abuse of position and failing to disclose information to fraudulent trading and false accounting. So under this new offense, there are a range of fraudulent acts that can be commissioned by a portfolio company or the GP that results in liability ultimately for the private equity company. Now, the second reason why this offense is of relevance to PE firms is that the offense is a strict liability offense, which means that to be found guilty of this offense, the authorities do not need to establish criminal intent or even show that the entity had knowledge of the offense being committed. So once the offense has been committed, private equity company cannot come out and say that they were not aware of the portfolio company's action to avoid liability. In fact, the only defense would be for the firm to show that it had reasonable procedures in place to prevent the fraud. So to summarize all of that in a few sentences, the failure to prevent fraud offense has meant that PE firms now face increased risk of liability from the daily operations of their portfolio companies, and this risk of liability is quite significant. However, not all entities will fall under the purview of this offense. It's only going to apply to an entity within a PE structure that meets two out of the three qualifying criteria. So firstly, if the entity employs more than 250 employees. Secondly, if the entity has total assets worth more than £18 million pounds and/or the entity has a turnover of 36 million pounds. Now, these criteria apply to the whole organization, including subsidiaries, regardless of where the organization is headquartered or where the subsidiaries are located. So that Tom is a very quick summary as to why these two offenses are something PE firms need to consider very seriously. Tom: Thank you, Ali. And we go on now to Roseanne. So Roseanne, what sort of conduct is going to create a problem under the failure to prevent fraud offence for private equity and their portfolio companies? Rosanne: So the way it works, Tom, under this failure to prevent fraud offence is that there are some specific base fraud offences which are referred to in the act that brought this new offence into force or is going to bring it into force, which must have been committed in order for a corporate to then have the criminal liability of failing to prevent that fraud offence. And what I'm going to do is refer to some practical examples. But before that, I just wanted to mention a few points, which are that we're not dealing with new kinds of misconduct. So the sort of practical examples that I will mention will be recognisable types of fraud. But what's new is that that misconduct will now more easily create criminal liability for the corporates under the new offence. The second point to mention is that the fraudulent conduct can be looked at from different perspectives, from the perspectives of the different entities and individuals who might be involved in the typical private equity structure. So although we're focusing on the failure to prevent offence, the same misconduct may give rise to liability for different individuals and different entities under different offences at the same time so for example the specific employee who may have done the the wrong act will be themselves liable personally for a fraud offence there may be liable liability for a corporate under the failure to prevent offence, in addition to liability for entities under this new senior manager offence, which Ali mentioned, if there were senior managers involved in the commission of the offence. So turning now to some of the practical examples, there were sort of four headings that I wanted to mention. The first is fraudulent financial misrepresentation. And here we're talking about some form of misrepresentation, for example, of the fund's performance. For example, if an individual within the general partner provides inflated valuations or misrepresents the performance of portfolio companies to attract investors or false statements to the limited partners or misleading disclosures, those kinds of fraudulent financial misrepresentations are the type of base fraud offence which could then create liability for failing to prevent fraud. Another area, misrepresentation to lenders or regulators. So, for example, some misleading information in a loan application to banks or private credit lenders to secure financing. Similarly, could amount to one of these fraud base offences, which could give rise to a failure to prevent fraud offence on the part of the entity. As I mentioned, these are sort of misconduct that won't be new to you and the listeners of this podcast. Other examples I'll mention briefly would be market manipulation, insider dealing. Obviously, we know that those are offences in any event, but they will now give rise to additional liability under this new offence, as could some fraudulent conduct in the portfolio companies, for example, accounting fraud or some tax evasion or false expense claims, all of which could be appropriate fraud that could give rise to liability. Tom: Thank you very much, Rosanne, for that level of detail and some of the examples where such fraud is caught by this legislation. So I'm going to turn now to Patrick. From a practical point of view, Patrick, what do private equity managers and their portfoli

20 min
12/11/2024

Private Equity Spotlight: Preparing for 2025’s antitrust landscape

Against the backdrop of a new administration, the introduction of new HSR rules in early 2025 will impose significant additional burdens and risks on deals subject to premerger notification in the United States. How will new DOJ and FTC leadership impact antitrust enforcement, can we expect the private equity industry to remain a key target under the new administration, and what can private equity firms do to prepare? In this episode of our Private Equity Spotlight series, private equity M&A partner Nick Gibson is joined by antitrust partners Michelle Mantine, Ed Schwartz and Chris Brennan. ----more---- Transcript: Intro: Hello, and welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content, please contact our speakers. Nick: Welcome back to Dealmaker Insights, the Reed Smith podcast series spotlighting the private equity industry. I'm Nick Gibson, a private equity M&A partner in the Chicago office of Reed Smith, and I'm excited to have antitrust partners Michelle Mantine, Ed Schwartz, and Chris Brennan here today to discuss the antitrust outlook for 2025 and what changes the industry can expect and start preparing for. We have a lot to cover today, so let's jump right in. So the U.S. presidential election was a few weeks ago, and a second Trump administration is quickly approaching in January. Let's level set for the audience. What is the current antitrust environment for private equity, and were there any major developments over the last four years that specifically affected M&A activity by private equity firms? Ed: Yeah, Nick, good question. This is Ed Schwartz, and I'll jump in, and I know Michelle and Chris are going to have thoughts as well. So, I mean, the short answer is there's been a sea change. Historically, the antitrust agencies, both the DOJ and the FTC. Really only focused on private equity and the nature of ownership to the extent that it related to adequacy of the divestiture buyer in a deal where divestitures were required. And that's an issue and a concern that goes back with the agencies for some time. Will a private equity firm be an adequate divestiture buyer and compete effectively and aggressively? The world has changed in that regard. Pretty early on, certainly by 2022, both the DOJ and the FTC were making very aggressive statements about their intent on focusing on private equity and whether private equity were going to be adequate or an acquisition by private equity would be adequate in order to preserve competition in a particular industry. And both Lina Kahn and Jonathan Kanter were making statements along the lines that we're going to take a muscular approach and expressing concerns about whether PE firms were in fact well-suited to compete as effectively and aggressively as other potential buyers. And it didn't take long for the agencies to begin taking action. And so we saw the first sent decree between the FTC and a private equity firm, and this was involved JAB and its subsidiaries, which owned a bunch of veterinary care clinics in Texas. And the Kitsets Decree. Was negotiated and effectuated and required significant divestitures. And we saw also a case a lot of folks are going to be familiar with, and that's the FTC's Law of Citizens, Welsh Carson, a private equity firm, and its portfolio company, which owned a bunch of anesthesia companies. And the complaint that was filed focused on roll-ups in that industry for the last, you know, the prior roughly 10 years. And this is the first case that we've seen that was like this in a number of ways. One, it focused on roll-ups by a PE portfolio company. Two, it sued to block the deal under Sherman Act Section 1, so it hasn't seen in a long time. Ultimately, the case was dismissed by the district court judge, importantly, because Welsh only owned a minority share. But, I mean, this was really a watershed moment that one of the agencies sued on this basis. So the short answer is there has been a sea change. I mean, it's effectively a complete turnaround in thinking about how the antitrust agencies think about ownership, the nature of ownership, and how effectively they may compete. And I think it's worth adding that since their loss in the Welsh Carson case, the agencies haven't let up. They've continued to issue a number of statements, sometimes along with other agencies, you know, really pounding on the fact that they're going to be looking very, very closely at private equity firms and just how effectively and aggressively they will compete following their acquisition. So the heat is very much still on with PE firms, at least in this administration. Michelle: And I couldn't agree more. I mean, really, since Biden's executive order back in 2020, the heat's been on and sort of been being turned up, right? With respect to almost every angle of antitrust enforcement, and PE has had sort of the share of the limelight, you know, often with industries like healthcare and tech, who sort of usually have that role from an antitrust perspective. Private equity has joined them. When you look at the revised merger guidelines at the end of last year and their focus on private equity, the final HSR rules, which will go into effect February 10th that were largely done under Lina Kahn and their focus on private equity and the ownership structures. The agency's public forum last March, really delving into private equity ownership issues and providing a forum for folks to sort of share their stories about private equity. In my view, it's been much of a one-sided story to date, unfortunately. The only real sharing of the other side, so to speak, the benefits of private equity has been shared with a public filing by an amicus brief in the USAP case where an interested party and association sort of laid out how private equity has also benefited from competition and market. So it's an interesting dynamic at the moment. The heat is very much on and definitely a challenging environment for private equity. Chris: I think some of this too, the numbers bear out that this isn't necessarily just the Biden administration. It's also the market over time. In 2022, two out of five deals involve some private equity participant. That is up way, way beyond where it was in 2000. So over the last two decades, you've seen a massive increase in private equity participation. Nick, I'm sure you have seen that in your practice. And so I think a lot of what we've seen from the Biden administration is really a feeling that enforcers were asleep at the wheel. Right. And when we can think about that in terms of other ways in which this has been a very active administration, we know that private equity is here to stay and that those rates may actually increase. The question is really going to be what happens if a new Trump administration takes a different approach. Ed: That's a really good point and an interesting perspective, Chris. And I think one that does bear emphasis is you could look at what's happened as the antitrust agencies finally capping up with the massive change in the nature of ownership in the United States that shifts from public equity ownership to private ownership. And, you know, and I agree with you. I think that perspective does bear upon, you know, or does help us think about what's going to happen in the future, you know, both in the Trump administration and administrations beyond. I mean, I think it may be too easy to chalk up what we've seen. Under the Biden administration, with private equity antitrust enforcement as well, it's more the same. We've seen very aggressive, some might say hyper-aggressive enforcement efforts to greatly, if not grossly, expand the scope of antitrust enforcement and chalk it up maybe too easily to that. And we do have to keep in mind that to some extent it arguably is attributable to the massive change in ownership and investment in the United States. It's probably worth just mentioning one more thing, and that is, you know, a lot of folks who listen to this know this, but the revised horizontal antitrust guidelines did include language, new language that expressly addressed private equity investment. And the language is where one or both of the merging parties has engaged in a pattern or strategy of pursuing consolidation through acquisition, the agencies will examine the impact of the cumulative strategy to determine if that strategy may substantially lessen competition or tend to create a monopoly. So this focus on roll-ups isn't, of course, limited just to a focus on private equity, but it does seem that that language was included in particular for the purpose of signaling that they're going to be looking hard at private equity. So one of the questions, and I don't want to jump ahead too far. So one of the questions that we're all thinking about is what changes are we going to see and what pullbacks are we going to see in enforcement policy under a Trump administration? Some of them are probably easy to predict. The FTC's policy statement about Section 5 enforcement issued in November 22, that's gone. I think we can all be pretty sure of that. Are the agencies going to revise yet again or even just withdraw? The revised horizontal merger guidelines and this new language with it. We'll see. If we take a step back and we look at what's happened in antitrust enforcement and merger enforcement in general with respect to private equity firms, I think you could look at it and, conclude that it's really a lot like we've seen with a lot of the merger enforcement efforts across the board under the Biden administration. I mean, put cynically, a lot of talk, not much action, and not much success. And I think to some extent, the agencies may be okay with that. Obviously, they don't like losing in court.

29 min
10/24/2024

Private Equity Spotlight: A conversation with Patrick Floeck of Valesco Industries

In this episode of our Private Equity Spotlight series, Reed Smith partner Nick Gibson is joined by Patrick Floeck, a principal at Valesco Industries, to learn more about his work in the lower middle market, with a focus on private and family-owned businesses. ----more---- Transcript: Intro: Hello, welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content through this series, please contact our speakers. Nick: Welcome back to Dealmaker Insights, the Reed Smith podcast series spotlighting the private equity industry. I'm Nick Gibson, a private equity M&A partner in the Chicago office of Reed Smith, and I'm excited to have Patrick Floeck of Valesco Industries today as our guest. Patrick and his team focus on the lower and core middle market, particularly in private and family-owned businesses, which we'll dive into today. But first, I'll turn it over to Patrick and let him introduce himself and Valesco. Thanks for joining us today, Patrick. Patrick: Hey, thank you, Nick, and appreciate you having me on. A little bit about myself and Valesco. We're, as you mentioned, a lower middle market private equity firm focused on primarily controlled buyouts and particularly like to be the first institutional capital. We pride ourselves with a long history of being a really good partner and helping family and founder-owned and operated businesses transition into that next stage and evolution of their business cycle. And what that has evolved into is utilizing our fund of capital to help employ things like process and procedure. Building out management teams and putting the right people in the right seats, putting in place the appropriate systems to help manage the business, to allow it to capitalize on the already strong demand that is in the market for products and services that the company provides and offers. And so we've developed a core strength of being a very operationally focused private equity firm that truly partners with the management team to help drive the critical agenda. Our focus is on businesses that are roughly $5 to $15 million of EBITDA, and primarily in the manufacturing, distribution, and some business services. We are industry and sector agnostic. It's easier to say what we don't focus on, which are specialty industries like oil and gas and other commodities, tech, software, healthcare services, et cetera. But if you can make it in a manufacturing plant and it has a strong demand and a unique value proposition, those are the types of companies that we really find attractive. I am a principal at the firm. I've been with the firm about 10 years. I run our origination and marketing strategy, as well as sit on a few of our portfolio company boards and help fundraising and other activities at the firm and sit on the investment committee. Nick: Very interesting. And what about your and Valesco's approach distinguishes you from other shops that might also take pride in partnering with management and kind of sit in the lower middle market? Patrick: It's a great question that I've been giving a lot of thought to because it's one that I think is always asked, whether it be by a management team or an LP. And I think, you know, Valesco has been around for 30 years and what we've been doing for the last 30 years, going all the way back to our founders that started out as independent sponsors through our first fund, which was very small, all the way now to our third fund. Which is $435 million. But our strategy and the way that we partner with business owners has never changed. We never wanted to be or set out to be an asset manager or a financial engineering private equity firm that looks to make a platform acquisition and do a bunch of lower multiple add-ons and cut costs in a way to producing a return. We really do focus on building the enterprise value via sales growth, better processes, better systems, capturing additional market share and wallet share, and really growing the enterprise value of the organization all while producing employment opportunities. Employment growth, etc. And so we really focus ourselves on investing in opportunities where we can invest in the growth of a business, as opposed to trying to cut costs and manufacture a return. We believe that returns should be the result of a better business and a better operation after we are finished with it. Nick: That makes a lot of sense. Where is Valesco at in its fundraising cycle and what are you hearing from your LPs this year that might differ from previous years? Patrick: We are fortunate in that we finished our most recent fundraise in the summer of 2023 and had raised the majority of that capital by the beginning of 2023. The last 12 to 18 months has been interesting. One of the things that we've been hearing is, number one, the pandemic has increased the hold period and life cycle for assets to the tune of about 18 to 24 months. And so a lot of funds that are looking to raise capital are being pressured to have to exit. However, it's not been the greatest exit environment given the increase in interest rates, the ups and downs of different headwinds in different sectors of the economy, the election coming up. And so what we've heard is a lot of allocators are looking to consolidate their commitments back to a handful of GPs that they know well, which is a little bit different from the last decade or so where we've heard that a lot of allocators had diversified their portfolios amongst a bunch of different GPs. And now it seems like they're starting to make bigger commitments to a more consolidated group of general partners. Nick: Got it. And you touched on this a little bit in terms of kind of understanding the concerns of management and family owned businesses. What are you hearing from founders and targets this year, particularly with, as you just noted, election seasons in full gear now? Patrick: Listen, I think I'm not an economist, but in my own opinion is that we've been in a recession for the last 12 to 18 months. It's been a bit of a slow burn. The indicators from history, I think, are different in that we are primarily a services-based economy in the new millennium relative to the past. And so the traditional indicators around what precipitates a recession, I think, are different. You also look at consumer spending and inflation. People don't save as much. There's not the incentive to save or invest as much across the economy. And so I think a lot of businesses are facing challenges and headwinds that have made them flat to down this year. Despite the consistent increase in consumer spending and inflation that we've had over the last few years, I think the recent Fed rate cut of 50 basis points is a really good indication that we've got inflation under control and maybe we were a little bit too aggressive and it's time to pull back a little bit. I certainly think that there is some uncertainty around what happens with the election. The two parties' policies and agendas are so different that I think it's creating a lot of uncertainty for business owners, for private equity firms, and it's manifesting in a way that everyone is just kind of putting deal-making on pause. Because if you have certainty, whether you like the outcome or not, you can plan for it and you can forecast and budget, but you can't plan and forecast for uncertainty. So, we're really not seeing a whole lot of activity right now in Q3 and likely into Q4 this year, but my hope is that by the first part of 2025, it will be a good environment for M&A transactions to pick back up. Nick: What are some of the trends you've seen, particularly in your end of the market, maybe some that aren't the obvious that are talked about as much? Patrick: Yeah, it's certainly kind of going back to, you know, non-cyclical and non-consumer facing manufacturing businesses. You've seen kind of a move away from, you know, the residential services, roll ups, the, you know, the med spas, all the things that are have been focused around consumer spending, as well as anything that has financing. Related to it, and really gone back to your old economy, manufacturers that are supporting industries like infrastructure, food and beverage, things like that. Even agricultural deals, we've seen quite a few of. I'd say anything that is large old economy type businesses, as opposed to anything that's service-based or consumer. We really haven't seen a whole lot of activity nor appetite. Nick: Got it. All right, bonus round now. Patrick, you're a big golfer. We first met over a round of golf and had a lot of fun. What is your favorite golf club in your bag? And then second part is, if you were a golf club among a set of clubs making up your deal team, what club are you and why? Patrick: Yeah, it's a fantastic question. And I appreciate the heads up on this one because it gave me some time to think about it. But I am definitely a wedge guy. I carry four wedges regularly. And the reason I like a wedge of any different degree is because it's such a utility club that you can utilize from multiple different distances, whether it's a full swing, a half swing a chip around the green you can go a high flop shot you can go a low bump and run a spinner that checks and the reason I like it is that if you can get good with that club you can typically get yourself out of a bad situation so if you hit an errant tee shot and you can put yourself back into the fairway with a wedge in your hand you still have an opportunity to get up and down for par. If you miss a green and you can utilize a wedge shot that's going to get you close to the hole and still have an opportunity to make a par putt. That's what I really like about it. That's where I've spent a lot of time trying to m

15 min
07/03/2024

Private Equity Spotlight: The current state of the health care private equity market

This episode features a panel discussion on the current state of the health care private equity market, comparing it to previous years and exploring how the industry has adapted, and continues to adapt, to remain competitive. The panel was moderated by Chris Sheaffer, global vice-chair of Private Equity at Reed Smith, and Nicole Aiken-Shaban, Life Sciences & Health Care partner at Reed Smith. Panelists included Tony Crisman, managing director and head of Healthcare IB at Stout; Daniel Schultz, managing director of BD at Webster Equity; Kevin Reilly, managing director at Ally Bridge; Brandon Cohen, principal at H.I.G. Capital; and Brian Bewley, Life Sciences & Health Care partner at Reed Smith. ----more---- Transcript: Intro: Hello, welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content through this series, please contact our speakers. Chris: Welcome to the panel. Appreciate you guys taking part in this kind of state of the healthcare healthcare market panel as part of our private equity healthcare forum being hosted in the New York office today. We've got a great panel together. Maybe before we start, we'll kind of kick things off with introductions. My name is Chris Sheaffer. I'm vice chair of Reed Smith's private equity group. Nicole: Nicole Aiken-Shaban. I'm a partner in Reed Smith's Philadelphia office with a focus in healthcare regulatory and transactional work, and particularly in the private equity space. Tony: Tony Crisman, Managing Director, Head of Healthcare Investment Banking at Stout, 25-year healthcare investment banker. I was at Lincoln for 15 years before that and started out at an old name firm, Dain Rauscher Wessels. Brandon: Brandon Cohen, I'm a principal at HIG Capital based out of Miami. I spend all my time in healthcare. Daniel: My name is Dan Schultz. I'm a Managing Director at Webster and I manage all of our business development. Kevin: And I'm Kevin Riley. I'm Managing Director at Ally Bridge Group. We're a life sciences-focused healthcare investor, predominantly in biotech and medtech, mainly focused on growth stage transactions. Brian: Good afternoon. My name is Brian Bewley. I'm in our life sciences and health industry group like Nicole and heavily focused on private equity transactions. Chris: So let's just dig into it. I mean, private equity investing in healthcare has been a very hot topic over the last couple of years. You know, the market generally between interest rates, you know, macro events, obviously an upcoming election. There's been a lot of focus on the regulatory side recently. Look, Tony, you're sitting closest to me. I mean, look, on the investment banking side, you guys obviously see quite a lot. I mean, how has 2023 been? How's the first ’24 been? How's the first half of the year? Tony: It's been an interesting start to the year. I think that there was a lot of pent up demand, an interesting thing that I always think about. The beginning of my career, capital was the scarcity and assets were the commodity, and we're completely upside down. And we were trending that way over the last 20, 25 years. But I think a lot of people were really hoping for a tidal wave of transaction activity to start ’23, or start ’24. And I think for the most part, what we've seen coming to market are a lot of assets that bankers and private equity have been kind of holding on to maybe late ’22, ’23 might have been their initial timing. But just looking at the overall market dynamics and things of that nature, they were kind of held. So it really started to perk up in late March. And I do think that the regulatory dynamics, they always drive deal activity within healthcare, which is why it's technically attractive. And so you do see a lot of portfolio adjustments through COVID and into the current day in terms of where healthcare investors are looking to deploy capital, not just recession resistant, but pandemic resistance. Chris: Brandon, what are you guys seeing on the sponsor side? I mean, have you guys been hearing from your LPs a little bit more? I mean, how are things going with HIG? Brandon: Yeah, I'd echo some of the comments. It felt like the first month or two of the year were a little bit slower than expected. I was actually looking back at some data. Our healthcare deal volume is probably up 30%, 40% in 24 year-to-date versus the same period in ’22, ’23, still off of the 2021 peak. The interesting thing that we've seen is just the quality of the assets. You mentioned in, people holding things back. And we've seen, it feels like the number of deals getting done are far fewer than that 2021 level, despite the volume being fairly close. And it feels like buyers are still pretty cautious, right? We've seen a lot of instances where a banker tells me, hey, got a dozen IOIs or multiple turns higher than you. And weeks later, that deal kind of falls apart. And on the sell side, we've seen several processes where buyers kind of complete most of their work and don't show up at the end. And, you know, I don't know that that's healthcare specific, but it just feels like buyers are fairly cautious and, you know, sellers don't necessarily want to take a discount to 2021 levels. Chris: Yeah. I mean, I think that extends well beyond healthcare. We're seeing the same thing regardless of market and sector. It just seems like the valuation still needs to be bridged a little bit, both healthcare and otherwise, but hopefully, you know, we're optimistic for the back end of the year here. Nicole: Brian, this one's for you. Chris did mention some of the recent changes in the healthcare industry that have been happening recently. Could you give a brief overview of those to the participants here today and thoughts on what investors should be thinking about on the horizon when they're looking to invest in the healthcare space? Brian: Thanks, Nicole. I actually printed off something because this is a year where there's quite a bit of activity, so it's unusual. There's been a lot of developments on both the state and federal level. I'm sure most of you have been following it. At the state level, several laws have been passed. There's some laws that are pending. Really around, I think approximately 13 states now have promulgated or adopted essentially many HSR laws requiring notice and at times approval by the state governments for private equity transactions. There are some states that are, for lack of a better way of saying it, worse than others, more restrictive. California, Illinois, Minnesota, and New York are the four that I wrote down that are incredibly restrictive because they require pre-merger notification requirements and then also approval of the transaction. At the federal level, similarly, there's been quite a bit of activity from the antitrust side. And I'm not an antitrust attorney, but because I do a lot of of work in this space. It's obviously on the top of minds of us as counsel, but also our clients. The first thing, FTC, DOJ, and HHS issued a joint request for information in March of this year to examine private equity's role in healthcare consolidation. They actually extended the deadline for responses to June 5th, which has already passed. Obviously, we don't know the outcome of that RFI and what they're ultimately going to do with it. But I assume that probably by the end of the year, we'll see some activity resulting from that RFI that the government issued. And as you all probably know, because you've gone through deals that require these HSR filings, but FTC has proposed changing to the filing requirements that would increase the disclosure obligations for healthcare deals. Usually I'm generally reluctant to talk about proposed legislation because it's just proposed and you don't know for sure if it's going to come to fruition, if it will ultimately result in some sort of law that's promulgated. But I think it was about four weeks ago, Senators Warren and Markey proposed, and this is the exact title of it, Health Over Wealth Act. There's a lot of different things that it requires. If it's successful, it will require private equity firms to obtain licenses from the Department of of Health and Human Services to invest in health care entities. And if you fail to qualify or obtain a license, you would be restricted from doing deals in the health care space and potentially would have to divest portfolio companies. This would also allow HHS to block deals pending their review, and then it would also require that the PE firms disclose financial and operational data, including debt levels, political spending, what wages are going to be, and what facilities are going to be utilized and not utilized. And then the last thing that would be required, again, if this is successful, is that there would have to be an escrow account. You'd have to establish an escrow account to cover all health services costs for five years should there be facility closures. Now, again, this is their proposal. I think there's quite a bit. I don't know if it will be successful. And frankly, even if it is, I think it's going to be challenged because of how restrictive this law would be. And frankly, it's anti-capitalistic. And so I'm not sure how much legs or how if it will actually get legs but it is certainly something that we should all be paying attention to and then I guess the last thing and this is more of a general theme and some of you are probably members with like the American investment council but a lot of the activity that we're seeing at the state and federal level you know is the result of really one-sided narratives that are being pushed about private equities role and and health care transactions and obviously at the FTC

32 min
06/17/2024

FTC Non-Compete Ban: What you need to know

Reed Smith partners Mark Goldstein, Cindy Minniti, and Michelle Mantine come together to break down the Federal Trade Commission's final rule on non-compete agreements and how it may affect U.S. businesses. ----more---- Transcript: Intro: Hello, and welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content, please contact our speakers. Mark: Welcome back, everyone, to Dealmaker Insights. My name is Mark Goldstein. I'm a partner in Reed Smith and Labor and Employment Group, and I'm joined by my colleagues, Cindy Minniti and Michelle Mantine, both partners as well at the firm. Today's topic is non-compete agreements. Been all over the news lately. Non-compete agreements have long been used by businesses to bar key employees from leaving their business and going and setting up shop across the street the next day. There are a whole host of reasons why businesses may want to impose a non-compete agreement on an employee. However, over the past several years, state legislators have worked increasingly scrutinized the use of non-compete agreements that passed a whole host of legislation. And finally, the U.S. Federal Trade Commission in April 2024 issued a final rule that if it takes effect, would prohibit virtually all pre-existing and future non-compete agreements across the U.S. So I'd like to turn it over to my colleagues today, Cindy and Michelle, and together we'll break down what the Federal Trade Commission's final rule says and how it may impact U.S. businesses. So, Cindy, let me start with you. Can you tell us a little bit about the background to the rule? Cindy: Sure. Thanks, Mark. Like you said, there have been a lot of state legislation recently over the last couple of years, really trying to limit the use of non-compete agreements. And President Biden in July of 2021 directed the Federal Trade Commission to come up with some federal legislation really limiting the use of non-compete agreements. In an effort to really be wide sweeping in January of 2023, the FTC put out a proposed rule, which got a lot of attention from businesses and a lot of people commented on the proposed rule during the comment period. There were about 26,000 comments to the proposed legislation. And then ultimately, the proposed rule is now out as of May of this year, it was published in the Federal Register. And like you said, if it does go into It will go into effect in September. But it really is an absolute ban to non-compete agreements. There are very, very limited exceptions, but this is really an absolute ban on current and future non-compete agreements for virtually everyone. There's a small exclusion for senior executives and some other minor exclusions, but really this is an effort to really stop people from really enforcing non-competes on their workforce, really open up people and to be able to go to competitors. It's also interesting that it's not just for employees. The proposed rule is for anyone that's really doing work. So So employees, contractors, anybody that's got any kind of a relationship. So independent contractors, interns, it's really very broad sweeping. Mark: That's a great point, Cindy. And the definitions within the final rule are really key and are extremely broad. The definition of worker, as you said, the definition of non-compete clause is quite broad. Michelle, let me ask you, because I know that this is a question a lot of our clients have asked. We understand that future non-compete agreements after the rule takes effect, if it takes effect in September as the currently scheduled effective date, those would not be above board. But what about pre-existing non-compete agreements? I know Cindy alluded to it, but how does the final rule adjust pre-existing non-competes? Michelle: No, it's a great question, Mark. And as Cindy said, it's pretty broad sweeping. Yes, the final rule absolutely applies to pre-existing non-compete agreements. There is sort of or are limited exceptions. The exception that I would note here in particular is for pre-existing non-compete agreements entered into with senior executives. And that term, like so many of the other definitions that accompany this rule, is defined very carefully and specifically in terms of what it means to be a senior executive. And if you fall outside of that category, the ban does apply. With respect to those other pre-existing non-compete agreements, those not with senior executives, I mean, the ban is saying, as Cindy pointed out, that the agreements will not be enforced. First, they are illegal, and that would be after the final rule's effective date, which currently absent any changes from it based on litigation is September 4th. The FTC is also saying as part of this guidance that the employer must provide clear and conspicuous notice to the worker of these sort of factors to make it very clear to the worker that if they have this pre-existing non-compete agreement, it's going away very soon. So the exceptions are extremely narrow. And again, something that if you're looking on relying on an exception for the senior employees, the senior executive employees, or in another context, you really need to look closely at the definitions to make sure you're in a safe spot. Cindy: Michelle, that's a great point about the definitions. Another question we get a lot is when you talk about non-compete, what about competitive activity during employment? And I think it's important to note that this is a broad sweeping regulation for post-employment restrictions. So we still are able to have employers banning current employees from having any sort of competitive activity during their employment, that this is really post-employment competitive activity that we're talking about. And I think it's just important to note. Michelle: Great point, Cindy. Let me ask, are there any exceptions? I know, obviously, we have the carve out for pre-existing agreements with senior executives, which from a high-level perspective, the rule essentially defines as someone making at least $151,000 a year and in a policymaking position. Besides that, are there any, Cindy, let me ask you, are there any exceptions to the rule? Some state legislatures, like in California and Minnesota, who have adopted all-out bans on restrictive covenants, do still include a carve-out, for instance, in the sale of business context. Cindy: Yeah. So I think that's probably one of the most talked about things right here is it's a bona fide sale of business is an exception. And there was a lot of discussion about what is a bona fide sale of business and are there percentages or a threshold that should be considered. Considered, and that was a lot of the comments and a lot of the consideration, but this final rule does have a carve-out for bona fide sale of the business so that you could have a restriction there because there are other interests at stake. And there are two other sort of litigation exceptions as well. So if there was litigation or if there was some interest in enforcing the non-compete before the rule goes into effect, or if there's a good faith belief that the rule is inapplicable. So, you know, I guess if you're arguing, is someone really a senior executive, or if you believe that they are a senior executive, something like that. But so those are the two sort of litigation exceptions. But I think really, the sale of the business is probably the one that we're going to see the most. Mark, did you have any thoughts on the sale of business and all of the discussion and back and forth, you know, before the final rule was proposed? Mark: Yeah. So I think that the sale of business exception probably is the biggest change between the proposed rule and the final rule. Generally speaking, the proposed rule that came out in January 23 is conceptually the same as the final rule that came out in April, May of 2024. Some of the language was tweaked, but the underlying concepts are the same. But the sale of business exception changed substantially. And the reason for that is because in the proposed rule, the FTC said that this carve out for the sale of business would only apply if the person that you're trying to bound by a non-compete is purchasing or owns 25% or more of an ownership interest in the entity at issue. So if somebody had a 12.5% ownership interest, the sale of business exception would not apply and they could not be bound by a non-compete. So in the final rule, the FTC dropped that 25% requirement, really conceding that there was no specific underpinning or justification for that metric. However, the FTC has said that despite this, they do anticipate rigorously looking at transaction to make sure that folks aren't entering into what they call sham deals. So essentially make sure there's a genuine bona fide sale at issue, not some sort of attempt to evade the FTC's non-compete ban. Cindy: I’m going to jump in on that. I think that's really important because we were hearing a lot of questions when we saw the proposed rule about what really is a sale and what if there are some corporate maneuvers that can happen, would we still have the enforceability of these restrictions? And I think that the comments and the commentary took a long, hard look at that and tried to make this as broad as possible. Mark: Yeah, that's exactly right. And the FTC even calls out things like repurchase rights or mandatory stock redemption programs and makes clear that those are not bona fide sales transactions, so they would not be subject to the exception. Obviously, particularly in the private equity space, businesses will be looking to capitalize and see if there are transactions that can be deemed bona fide that perhaps are broader than the scope initially con

26 min
06/05/2024

Private Equity Spotlight: A Conversation with Matt Carlos of New Water Capital

In our latest episode of our Private Equity Spotlight series, Reed Smith partner Nick Gibson is joined by Matthew Carlos, a principal at New Water Capital, for a deep dive into the unique aspects of Lower Middle Market Private Equity. ----more---- Transcript: Intro: Hello, and welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content, please contact our speakers. Nick: Welcome back to Dealmaker Insights, the Reed Smith podcast series spotlighting the private equity industry. I'm Nick Gibson, a private equity M&A partner in the Chicago office of Reed Smith, and I'm excited to welcome Matt Carlos of New Water Capital as our guest today. I've really enjoyed getting to know Matt and his team who have focused and thrived in the lower middle market. Matt wears a lot of hats at New Water Capital, and that's one of the topics we'll dig into a bit today. But first, I'll turn it over to Matt and let him introduce himself and New Water Capital. Great to have you here, Matt. Matt: Thanks, Nick. Appreciate you having me and happy to chat through the latest and greatest of New Water here. So I can dive right into a quick background on myself and on New Water. So I'm a principal here at New Water Capital. Been with the guys now for over seven years. Joined back in January of 2017. The fund officially started in 2016 and was originally a spin out of Sun Capital Partners. So Jason and Brian spent around a decade together at Sun. Saw Sun grow from a few hundred million under management, multiples of billions. I'm sure as as you know. And the rationale or the reason to spin out and do their own thing, create New Water, was to refocus on the lower middle market. And we've incrementally refined that for us to be really focused on what we call blue-collar industries. So manufacturing, industrial services, packaging, distribution. That really covers the majority of what we're focused on. From an end market perspective, we're a bit more agnostic. So if you look at in our portfolio. It's food and beverage, it's industrial technology, auto, packaging, you name it. And so we do tend to be more operationally focused and much more opportunistic. So we've got an in-house ops team, ex-CEO, CFO, COO type folks who work exclusively for New Water, so not consultants on hired guns. And so they are invaluable in dropping into our portfolio companies and help them think through next steps. So there's just creating KPIs, budgeting, walking the shop floor, look at efficiencies, and or just being a shoulder to cry on, quite frankly, as we go through growing pains or integration. And so really a valuable part of the team, but it helps kind of differentiate what New Water does in the market, which is really focused on where we can help portcos grow, improve, and. Get to the next level. Nick: That's great. Can you talk about the various hats that you wear in your role particularly, and maybe how that differs in approach from other private equity firms? Matt: Sure. Yeah, we are a lean team. And so because of that, like you mentioned earlier, we do wear a lot of hats. First and foremost, I think other private equity funds that are our size and focus in our industries, I think it's very typical for those firms or a lot of our brethren these days to have a designated business development arm. We at New Water do not at the moment. I think at some point in the future, hopefully we will be large enough to where it's needed. But at the moment, we don't. And so what that means is that myself and the other folks on the deal team here, we will kind of pass the hat or pull straws to just do the best we can to attend as many events and conferences, to be doing city visits visits, and meeting with intermediaries and bankers and lenders as much as we can. And of course, that takes away from, I guess, what you can say is our day job or what we are focused on most actively, which is portfolio management and getting deals done. The flip side is that I think if you were to poll the audience here in the deal team, we really do like being out in the market. I think it gives us a flavor, some firsthand experience of what people are saying, what other private equity funds are experiencing in real time, what bankers are seeing in real. And another angle to that is that a lot of our investment banker and intermediary friends, they feel like they have access directly into the deal team when they see us out on the road as well. So I think it works both ways. But additionally, what really makes us different and what we really focus on is on that ops part of the business. And so not just the operations team, do they focus a ton on portfolio management and portfolio improvement. Really, the deal team does as well. We oftentimes are just an extra set of hands for our leadership teams that are portfolio companies. And so when you get down with diligence and the ink dries on the purchase agreement, the folks who know that investment best right out of the gate is the deal team. And so we're really helping to help them think through forecasting and building out weekly flash reports and budgeting and all that good stuff. And then skew rationalization analysis, ad hoc analysis, we're oftentimes just extra arms and legs for the DLT or for the leadership team at our portfolio companies, just get stuff done out of the gate. And then over time, our ops team plays a much more active role with those portfolio companies, but it transitions that way over time. Nick: Where is New Water at in its fundraising cycle? And what are you hearing from LPs this year that may differ from previous years? Matt: Yeah, great question. Fundraising, obviously, a hot topic across the private equity universe. So for New Water, we are winding down fund one. We've got three assets left in fund one. Two of those three are pretty mature. And so hopefully in the next handful of months here, those will be officially in market via sell side. And fund two is ramping up we probably got enough room and fun too to do a couple more investments platform investments and so I put two and two together we're we're kind of knocking the door for for raising funds that's that's super exciting for us. The market so what what we're hearing is that the current state of the fundraising market is not too different this year from where it was last year. So I'm sure you're well-tuned to just general deal flow. It has been slow for the past couple of years. That means capital is not being recycled very quickly, which means LPs don't have a lot of room for allocations. And so the dam kind of has to break at some point. I think everyone knows it's going to happen. It's a matter of when. And so if you are listening to what LPs are saying, it feels like 2025 is the year in which more allocations are expected. And so we certainly hope that that's the case. We know that the fundraising environment has been tough over the past couple of years. And so once the wheels start turning in a more normal fashion in the market, assets are trading hands, there's more deal activity, we think that that domino effect will lead to more fundraising opportunities for the property equity universe. Nick: Reflecting back on 2023, what were some of the market observations you had, maybe challenges you face, and then opportunities within 2023 that you found? Matt: So 2023, I just mentioned it a little bit. It definitely was slower deal activity. I think 2022 was slow. And the numbers will tell you that 2023 is even slower than 2022. So definitely not a flurry of deal activity. The deals that we did get done were interesting. A lot of assets had what we were calling noisy EBITDA. So in this kind of post-COVID world we're living in, a lot has happened. Think about labor shortages, shipping crises, semiconductor shortages, commodity prices ripping. And so you add all that together and that just creates, again, kind of a noisy environment to look at an asset super clean and to really understand what's a normal margin profile or a normal growth rate you can expect out of the business. Again, given all those noisy dynamics over the past couple of years. And so it just took a lot more work and a lot more negotiating with sellers to come to a compromise on what's practical, what's transactable, what can two sides agree upon. So noisiness on what did get done was definitely an overarching theme for us. That's tighter leverage, of course. I think everyone's been well aware of what the debt markets have done over the past couple of years. Obviously, higher spreads, higher rates on that debt leads to just lower valuations and tighter leverage overall. Not a lot of platform opportunities for us. Specifically, we were being much more stringent, maybe a bit of a tighter filter on what we wanted to transact on from a platform perspective. But we got a ton of that on top. So I think eight transactions we completed over the past 15 months or so, all strategic add-ons for our current portfolio. So definitely active, definitely a lot of work getting done. You know, quite frankly, not a ton on the new platform front. Nick: Got it. And now that we're into Q2, what are some of the trends you're seeing in 2024? Has anything carried over, at least in what you're seeing in your end of the market? Has anything surprised you yet? Matt: So if you would have asked me a month ago, I would have said no real change in 2023. But really over the past month, we've seen deal activity pick up a pretty good bit. Definitely not this watershed moment where all of a sudden, it's blow your doors off busy, but it's definitely busier. Pipeline's a little fuller. There's more opportunities out there. We're actually seeing a lot of carve-out opportunities. The reason for that,

22 min

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Reed Smith transactional lawyers delve into the latest themes affecting the corporate world and provide perspectives into the legal and commercial considerations impacting how transactions get done. Their insights will help you navigate the complexities of deal-making across industries around the globe.

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