Q&A: Wafra Partners’ Andrew Thompson on middle-market trends
June 23, 2015
Andrew Thompson is a principal at Wafra Partners and also serves as a vice president of Wafra Investment Advisory Group; prior to joining Wafra, he worked in the corporate finance group of Navigant Capital Advisors. We sat down with him to discuss current trends in the booming private equity middle market.
Since the last time we spoke, how has business been for you? What trends in the middle market have you seen accelerate or slow down in 2015 to date?
Things have been very positive—we are actively working three separate platform build-up strategies and have two existing platforms in the market. Our West Coast office is now up-and-running and we are focused on continuing to develop our presence in such an attractive marketplace.
In the middle market, new deal activity continues to be competitive. We are seeing continued improvement in the overall economy, increased availability of debt capital with favorable pricing and terms, and upward valuation pressure. As the market has been heating up for some time now, I am starting to hear people question when this extended economic run will end.
When it comes to proactive sourcing, what are some of the ways you’re navigating the heated market and competing with other firms to secure quality deals?
We have refined our sourcing approach to be more focused by specific sector and by geography. We are allocating time and resources to sectors where we see opportunity, believe we have an edge or can create an angle, and often where we have partnered with an industry-specific advisor.
To the extent a seller or management team values a longer runway to execute on strategic initiatives or prefers to avoid the typical private equity treadmill, we are generally a good solution compared to many of our peers. Our long-standing experience with middle market companies is also valued by many sellers who are looking to take their business to the next level. We often provide a reference list of the bankers, sellers, executives and certain third parties we have worked with since 1990.
Following up on the question we asked last time about the proliferation of add-ons, given their popularity as of late, have you been finding even the middle market to be growing more and more competitive?
In addition to continued upward valuation pressure, we are seeing additional competition with buyers preempting processes and agreeing to close quickly by foregoing certain provisions and financing requirements. Despite these factors, we believe that there continues to be plenty of opportunity in the middle market, particularly when you have a proactive sourcing effort and an active approach which seeks to generate value.
Regarding the niche manufacturing space, what particular attributes is Wafra looking for, and what particular strategies are employed?
We seek niche manufacturing platforms with strong market positions in sectors with sustainability, growth prospects, and a variety of exit alternatives. We aim to leverage our capital, resources and experience to accelerate growth, either organically or through acquisition, by expanding the scale and scope of production, becoming more efficient, and driving competitive differentiation.
Our latest investment in the niche manufacturing space is a consolidation of wire harness and cable assembly manufacturers. So far, we have proactively sourced and privately negotiated transactions with three companies, and we expect to close on a fourth later next month. The sellers we have partnered with have seen the opportunity to join a larger platform and take their business to the next level. It is our plan to continue acquiring and assimilating these niche manufacturers and to position ourselves as the market leader in the space.
What’s one of the more notable Wafra success stories as of late? What drove that success?
Our recent exit of a portfolio company in the test and measurement space highlights the merits and goals of our investment strategy. To start, this was a privately negotiated transaction in a space we had targeted for an accretive build-up. During our hold period, we helped drive organic growth initiatives and execute add-on acquisitions that filled out our capabilities, geographic coverage and management team. As a result of the team’s hard work and the platform’s development, the sale process was well received in the market place and the company was sold to a publicly traded strategic buyer.
We currently have two companies in the market and will likely take a third to market later this year. One thing that has been increasingly important to us is partnering with the right investment banker. We have benefited from working with advisors who have direct experience in the relevant sector and have relationships with the likely buyers. Current market dynamics make this a sellers’ market, and I expect this trend to continue throughout 2015.
The views expressed herein are solely Mr. Thompson’s and do not necessarily express the views or opinions of his employer.
PitchBook just published its first-ever European Middle Market Report. Get a free copy by clicking here.