Winter is Coming - How are Searchers preparing for the recession?

October 18, 2019

by an investor from Hobart and William Smith Colleges in Dorset, VT, USA

It's coming. Most of the world is in recession (Asia, middle-east, Mexico, Europe) and now the global industrial economy is in recession, including US and Canada. Trillion dollar Trump deficits and consumer spending are the two remaining bright spots.

M&A values have started to decline. While the headline multiple might be holding, ebitda is being more heavily scrutinized with less add-backs and allowed recasting.

Are searchers feeling pressure from funders? Are funders getting timid as the economy cools?
Are searchers desperate to get a deal done before the recession - and be guaranteed a regrettable price paid?
Are there searchers who can 'hibernate' and become a more aggressive buyer in###-###-#### months?
Do many searchers have the wrong investment partners for the next cycle?
I know there are few data points but what happened to searchers and search funds in###-###-#### ?

Forgive the angst this may cause amongst many of you.

Jeff

Reply by a searcher
from Texas A&M University in San Antonio, TX, USA

Banks, economists, institutional investors, the fed - almost everyone has a terrible track record of trying to predict recessions. But the impacts to a search are real, and probably worth thinking through. Two thoughts:
1.. If the S&P drops 40% is it harder to raise capital? Will investors with dry powder see more high-quality opportunities to deploy it? Will market terms shift more in LP's favor? Greater DD be required to convince investors of deal quality?
2. If I own a high quality, enduringly profitable business, do I start rethinking my retirement plans after watching the value of my SEP-IRA, vacation home, and other investments drop significantly? Maybe I decide to wait a few years, or that I need a higher multiple to sell today.

Reply by a searcher
from INSEAD in Wien, Österreich

Investors know how beneficial it might end up being to invest during a recession, so I don’t see raising acquisition capital as a big problem. The bigger issue is valuations: “Recession-proof“ industries, such as parts of medtech, will not see a significant decrease in multiples (at best in EBITDA). Companies being more affected by recession will see a decrease in EBITDA and multiples, making an investment attractive - but have you hit “rock bottom“ yet, and will you be able to “pull it out of the hole“ within your limited investment horizon as a searcher?

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