We recently had a chance to chat with Robert Landis and Lars Eriksson of The Riverside Company on topics ranging from European activity to deal sourcing. Mr. Landis is a Partner, Origination and leads Riverside’s global origination team and Mr. Eriksson is Managing Director, Head of European Origination.
On the U.S. side, we’ve seen deal flow remain fairly strong, with the lower middle market in particular rebounding in the first quarter of 2015. What are your expectations for deal flow through 2015, and what are the underlying factors behind your assessment?
Robert Landis: Deal flow was exceptionally strong from the beginning of the year until mid-February for our fund that makes larger investments, but our smaller fund continued to see strong deal flow until April. Deal flow has slowed, but it is still reasonably good. Investment bankers have told us they are busy pitching deals, and summer should be strong. I attribute this to considerable liquidity remaining in the market and ongoing low interest rates—despite the talk of rates rising soon. Sales might also be accelerated by proactive buyers (brokers and PE firms) and because the multiples are so strong. Now is a great time to test the waters for a seller. The last couple of bubbles peaked around 10x, so why not sell now? There is bound to be a correction in the market based on current multiples.
We keep hearing about difficulty in sourcing quality deals across the market as a whole—what’s your approach to sourcing deals in this environment?
Robert Landis: We have a large and sophisticated Origination team that I’m proud to lead, but the reputation of the firm helps us a lot. We also attract proprietary and/or limited auction deal flow because of our reputation as a firm that negotiates a fair deal and where the seller is encouraged to co-invest alongside Riverside to create a significant opportunity for a “second bite of the apple” when we exit alongside the original seller.
Lars Eriksson: It is certainly the case that most auctions are extremely busy processes and we have seen an increased focus on driving proprietary deal flow. Our avoidance of over-leveraging assets means that we spend more time upfront robustly testing investment theses to better evidence our ability to create true “alpha” and not simply leverage cash flow. Our dedicated origination team, comprising of some 20 professionals globally, makes this possible and is a true differentiator.
How has business been in Europe? What do you see as primarily driving activity on the continent, and do you expect those same factors to remain in place for the foreseeable future?
Lars Eriksson: We expect the deal flow to remain strong throughout 2015. This is due to healthy performance among companies in the lower end of the mid-market and on the back of low interest rates and a favorable sentiment in the public equity markets. In addition, deal flow in Europe is increasingly being influenced by the growing base of private equity-owned companies as well as succession issues among privately held companies. For Riverside, being a global operating-centric firm, Europe is viewed as an excellent “hunting ground” of well-performing companies ready to go international in their search for growth. Lastly, many sectors in the European mid-market have world class operations, technologies and management teams who have not been affected by the competition from low-cost producing countries.
Some of our recent data suggests that continued bolt-on activity in Europe is due not only to sponsors looking to expand geographically but also because of an increasing supply of distressed targets in the lower end of the middle market that can be picked up for relatively cheap. Is sluggish economic growth factoring into bolt-on activity in Europe, in your view?
Lars Eriksson: There is an element of this. We have seen competitors overpay (in our opinion!) for a business with the belief that they can “blend down” their price by doing bolt-on acquisitions at lower multiples. It is our belief, however, that a poorly executed add-on is the single fastest way to ruin an otherwise strong platform—and so we remain focused on “sticking to our knitting” and only buying the right bolt-on businesses that will genuinely catalyze growth. Thus, we would normally shy away from distressed companies.
Has your approach to the European middle market shifted at all in light of the financial and geopolitical issues going on today? Do you expect to make any adjustments if the macro environment changes substantially in a year or two?
Lars Eriksson: Our disciplined approach to sourcing high-quality opportunities remains the same irrespective of geopolitical issues. We will continue zeroing in on those we call “little leaders” showing a clear potential to grow outside their existing markets, where we best can leverage our global presence. We believe this is a true differentiator from a deal selection perspective in this hyper-competitive lower end of the European mid-market, where we seek the best assets. Having said this, we are certainly all having to work harder and we do follow important macro indicators that could impact our portfolio companies as well as our approach to sourcing deals, e.g. oil prices and exchange rates. Staying true to what we know and keeping cool heads in the face of an occasionally irrational market is important.
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