What hypotheses do you have about the current economic environment?
August 31, 2020
by a searcher from University of Pennsylvania - The Wharton School in Philadelphia, PA, USA
In my conversations with searchers and investors, I've discussed some interesting perspectives on how the economy (and possible outcomes of COVID 19) could affect the search environment. I would love to hear additional thoughts from this community.
In particular, what are your hypotheses on...
* Search funds launched (continue to grow in popularity in the near term?)
* Search fund investment (contract or expand?)
* Lower MM PE/M&A activity (increase or slow down?)
* Overall acquisition valuations/multiples (generally increase or decrease?)
* Other high impact trends (e.g., industries to watch, unique search strategies that will prove successful, characteristics of businesses that will command a 'COVID' premium or discount?)
Would love thoughts on any/all of the above. If interested, I'm also happy to share my synthesis based on the conversations I've had so far (feel free to DM). Thanks!
from University of Florida in San Diego, CA, USA
- The COVID-19 recession is going result in the formation of more search funds than would have occurred pre-crisis. We’re entering an environment over the next year where economic uncertainty prompts traditional MBA graduate employers to pull back hiring (see the following article from today’s WSJ: https://www.wsj.com/articles/m-b-a-s-are-usually-swimming-in-job-offers-by-now-not-this-year###-###-#### ?mod=hp_lista_pos5), so over the next 12 months fewer MBA grads than usual will have to weigh the opportunity cost of turning down a position at Goldman or Bain against starting a search fund. This means even more fierce competition for deals among searchers.
- I expect search fund investment to expand as the cost of capital remains low for the foreseeable future. As the NASDAQ continues to boom I think more high net worth investors will be open to taking some chips off the table and diversifying their portfolios partially away from public equities – I say this because the investors who I have spoken seem to feel nervous about the market’s ability to sustain last quarter’s performance in the face of continued economic uncertainty.
- Lower MM PE activity will increase as we get closer to a vaccine and the PE world adapts to work from home as the new normal. In my industry, I’ve seen a material uptick in lower MM deals come across my desk over the past two months after a virtual freeze five months ago.
- Multiples will increase as more searchers (along with more investor dollars) case the same deals.
I’m interested to hear your thoughts – let me know if you disagree with any of my assessments!
Rob
from Duke University in Mountain View, CA, USA
That being said, we are still in the midst of the situation, but there is also a chance that this is being accepted as the new normal. Since economic support from the government is now tapering off, we will likely see the businesses that can survive independently of that.
I know my thoughts do not directly touch on your questions, but there are still too many unknowns and I think too much faith being put in a vaccine (just look at the challenges the global supply chain is facing keeping up with what's needed now)..
But I agree about your point on opportunities that may be present underrepresented sectors compared to the standard B2B services. I imagine the more unappealing the business, the greater the potential opportunity. But the ETA ecosystem will likely have to become more accepting of these sorts of deals before we see a lot of them take off.