by Patrick Jones, VP M&A, CHEMARK
Consulting (Part 1 of a 3 Part Series)
Background. There is an old prov- erb, a back-handed insult really, something about living in interesting times. Perhaps you know the quote.
Well, I think these are indeed interesting times for many reasons, primarily because we have been living and
doing business in such a prolonged period of historically low interest rates. At
CHEMARK, we see a variety of companies and have the opportunity to work
with clients of all sizes and at every position in the value chain – raw materials
suppliers, formulators and end users.
Sometimes strategic considerations
necessitate acquisition or exit as CEOs
structure corporate portfolios and SBU
leaders seek to grow and optimize their
businesses. From our vantage point as a
specialized industry consultancy working with a multitude of clients, we see
many trends, commonalities and differences between classes of buyers and
sellers of business assets. The impact of
cheap capital on valuations, the resulting
buyer and seller behavior and ultimately the deal structures are among those
things heavily influenced by the general
interest rate environment.
In the past 20 years, as globalization
and the explosion of growth in China
has washed over the economic landscape, global wealth has become more
concentrated as evidenced by the exploding number of billionaires in China and
around the world. Forbes, publishes an
annual listing of the world’s billionaires
along with some basic statistics quantifying their estimated net worth, line of
business, etc.
In 2000, Forbes listed 470 billion-
aires with a total net worth of $898 bil-
lion. In 2015 totals were even greater
when Forbes counted 1826 people worth
over $7 trillion. It is estimated that 2016,
which so far is considered a down year,
the tally will include 1810 people worth
a total of $6.5 trillion. In May 2016,
Bloomberg estimated that, “$4 tril-
lion in family capital globally is up for
grabs.” It has been estimated by others
that perhaps half of this capital resides
or is controlled by those who reside in
the U.S.
Similarly, since the Great Recession,
corporations have amassed unprecedent-
ed cash balances. According to a June
11, 2015 article published by Business
Insider, at the end of 2014 U.S. non-
financial corporations had amassed a
cash hoard of $1.82 trillion, up 5 percent
from 2013 and growing, with the top 25
cash holders controlling 48 percent.
Companies such as Google, Pfizer
and General Motors reported cash bal-
ances in excess of $50 billion each at the
end of 2014 with Apple and Microsoft
maintaining cash in excess of $100 bil-
lion apiece. By January 2016, according
to New York Times Magazine’s Adam
Davidson, the U.S. corporate cash total
exceeded $1.9 trillion.
Initially cash accumulation was seen
as insurance against another global fi-
nancial calamity, and it has evolved
into dry powder presumably poised for
investment in the next great thing that
promises to transform our way of living
and/or doing business. It is accumulat-
ing over time as a result of conservative
financial management and elaborate
tax-minimization strategies that have
generated huge overseas cash balances
that cannot be repatriated easily.
Meanwhile, economic waters have
calmed considerably and the world’s ma-
jor economies are no longer on the brink.
Yet, while consistently positive, growth
has been tepid and to many wage earners
the recovery just has not felt like a true
recovery should feel.
For this reason what happens to all
that available private capital and public
company cash should be of interest to the
rest of us.
Because, no matter how you slice it,
these are staggering sums of money, and
how, when and where the capital is de-
ployed (or not) has a tremendous influ-
ence on our general economic well-being.
Private Equity. As I noted at the out-
set, the backdrop to the current environ-
ment (and perhaps a major contributing
factor) is the prolonged period of near-
zero interest rates in the world’s major
economies. This low-yield investments
universe has been particularly perplex-
ing for the managers of the world’s elite
fortunes where lifestyle support, pres-
ervation of generational wealth and tax
minimization are dominant concerns.
When interest rates on even long-term
debt barely cover short-term inflation,
where does one go to find an acceptable
risk-weighted yield?
The days of safely allocating a size-
able portion of the family nest egg to
fixed income investments and enjoying
attractive cash-on-cash returns have giv-
en way to an altered reality where asset
allocations are necessarily more heavily
weighted in higher risk asset classes, and
alternative investment vehicles such as
hedge funds and private equity limited
partnerships become critical.
Private Equity (PE) is the largest
so-called alternative investment asset
class, and due to the industry’s impact
on mergers and acquisitions activity, we
will take a closer look at the fundamen-
tals, dimensions and factors driving the
growth and performance of the sector.
In its 2016 report entitled “Private
Equity Growth in Transition Evolve
to Meet Tomorrow’s Challenges,” the
Deloitte Center for Financial Services
pegs global Private Equity assets, exclud-
ing venture capital, at $3.65 trillion with
a 13. 5 percent compound annual growth
rate (CAGR) since year end 2005.
Hedge funds, by comparison, comprise
$2.8 trillion with a 7. 5 percent CAGR
over the same period. PE asset growth
We Are Seeing the Beginning Stages of a New
Normal for Middle Market M&A
