covid-19 impact on private company valuations and …

W E B I N A R

COVID-19 Business Resources Webinar – June 10th, 2020

Business Continuity: COVID-19 Impact on Private Company Valuations and Mergers & Acquisitions

Bobby LaCour, Partner, Aldrich CPAs + Advisors

Brian Andreosky, Senior Business Advisor, Aldrich Capital

Carl Pinkard, Partner, Aldrich Capital

Eliot Peters, Managing Director, RA Capital Advisors

Naomi Derner, Managing Director, Vantage Point Advisors

RA Capital Advisors LLC, Member FINRA and SIPC

MEET YOUR MODERATOR

Bobby LaCourPARTNER, ALDRICH CPAs + ADVISORS

Bobby has over fifteen years of experience in public accounting while serving his

clients in the government, nonprofit, and private middle-market sectors.

He specializes in providing consulting, attest and accounting services, in

addition to an extensive background in internal control and operations analysis.

2

MEET YOUR PRESENTERS

Carl Pinkard, CFP®, CEPAPARTNER, ALDRICH CAPITAL

Since 2002, Carl has specialized in working with high net worth families, business owners and medical practitioners, providing financial planning and consulting services. He also works with pension committees and assists with a number of non-profit organizations.

As a leader of our Private Wealth group, Carl helps shape our comprehensive and integrative service model that provides investment management, financial planning and tax services to our clients in San Diego. He also helps guide business owners to help them maximize the value of their business and is a member of the Exit Planning Institute (EPI). He serves on the board of Champions for Health, formerly San Diego County Medical Society.

3

Brian Andreosky, CEPASENIOR BUSINESS ADVISOR, ALDRICH CAPITAL

Brian joined Aldrich in 2019 and is dedicated to helping business owners transition their companies. In this role, he provides exit planning services to help clients maximize the value of their businesses one to five years before marketing the business for sale and is a member of the Exit Planning Institute (EPI).

MEET YOUR PRESENTERS

Eliot PetersMANAGING DIRECTOR, RA CAPITAL ADVISORS

Eliot is a Managing Director with RA Capital Advisors and brings 20 years of experience as an advisor to his clients and plays a key role in the firm’s strategic direction and execution of client engagements. Eliot has considerable expertise in the design and execution of successful processes for sales, mergers, and recapitalizations of founder-led or privately-held businesses.

4

Naomi DernerMANAGNG DIRECTOR, VANTAGE POINT ADVISORS

Naomi is a Managing Director with VPA and brings over 20 years of experience performing valuations of businesses, securities, and intangible assets, serving angel-, venture-, and private equity-backed start-ups, family-owned and closely-held companies, and publicly-held companies. She has specific valuation expertise in technology, life sciences, food, beverage, cannabis, hospitality, media, and consulting.

DISCUSSION OVERVIEW

• Performance and valuation of public equity markets

• Trends in M&A valuations

• Venture Capital investment

• Private Equity

• Considerations for Business Owners

5

The information provided herein does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. Readers of this presentation should contact their attorney to obtain advice with respect to any particular legal matter. The information was updated as of June 10, 2020 and we recognize it may change. Please contact your Aldrich Advisor for the most up to date information for your situation.This session is being recorded and may be redistributed or replayed.

Public Markets

6

RECENT PUBLIC MARKET PERFORMANCE

S&P 500 DJIA NASDAQ

Private company valuations won’t necessarily linearly correlate to public market performance, but public equities are generally a good leading indicator. Does your set of buyers include publicly traded companies?

Source: S&P Capital IQ

3,386

2,237

3,123

2,100

2,300

2,500

2,700

2,900

3,100

3,300

3,500

‐33.9%

‐5.7%

29,348

18,592

27,111

18,000

20,000

22,000

24,000

26,000

28,000

30,000

‐36.7%

‐7.6%

9,817

6,861

9,814

6,500

7,000

7,500

8,000

8,500

9,000

9,500

10,000

‐30.1%

‐0.0%

7

‐23.5%‐21.6%

‐12.0% ‐11.0%‐9.3%

‐8.0%

‐30.0%

‐25.0%

‐20.0%

‐15.0%

‐10.0%

‐5.0%

0.0%

S&P 500 (Index ValueChange in Q1‐20)

Apollo GlobalManagement

KKR Blackstone* Ares CapitalManagement

The Carlyle Group

Portfolio

Mark Do

wn %

IMPACT ON PRIVATE EQUITY VALUES FOR Q1 2020

Public Private Equity firms also experienced decreases in portfolio value, but held up better than public markets

Note(*): Excludes energy, entire portfolio down 21.6%Source: PitchBook, Company press releases and SEC filings

8

PARALLELS TO THE GREAT RECESSION?

S&P 500 DJIA NASDAQ13,265

5,500

6,500

7,500

8,500

9,500

10,500

11,500

12,500

13,500

14,500

‐50.6%

‐36.3%

‐7.5%

2,652

1,100

1,300

1,500

1,700

1,900

2,100

2,300

2,500

2,700

2,900

‐52.2%

‐30.8%‐14.4%

So far, there is limited comparability to the Great Recession, which started slow with modest decline. Markets then saw a sharp decline but recovered from lows prior to the official end of the recession


1,468

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

‐53.9%

‐37.4%

‐9.4%

PERFORMANCE WILL BE INCREASINGLY INDUSTRY & COMPANY SPECIFIC

Company value will continue to rely on the three pillars of value: growth profile, margin profile, and risk profile


6.4%

‐1.6%0.0%

‐5.7%‐9.9%

‐10.8%

‐45.0%

‐35.0%

‐25.0%

‐15.0%

‐5.0%

5.0%

15.0%

Percen

tage Cha

nge fro

m Feb

ruary 19

th

Biotechnology Index U.S. Healthcare Index NASDAQ S&P 500 U.S. Restaurants & Bars Index U.S. Industrials Index

8.4x

14.4x 14.6x16.0x

19.6x

14.7x13.0x

14.8x

12.4x

17.3x

7.3x

12.6x 13.0x14.6x

18.6x

14.0x12.5x

14.7x12.4x

18.6x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

Energy Utilities Industrials Consumer Staples IT S&P 500 CommunicationsServices

Healthcare Materials ConsumerDiscretionary

TEV / E

BITD

A

2/19/2020 6/5/2020

IMPACT ON PUBLIC COMPANY VALUATIONS

Valuations of public companies have been reduced, with Healthcare, Consumer Discretionary, and other particular sectors maintaining more value than others


‐13%

‐13%‐8%

‐5%

‐11% ‐5%‐4%

‐1%

0%

7%

Venture Capital

12

$31.8

$27.4

$0

$5

$10

$15

$20

$25

$30

$35

3/15/2019‐ 5/31/2019

3/15/2020‐ 5/31/2020

Capital Invested (USD

$bn

)

2,249

1,751

0

500

1,000

1,500

2,000

2,500

3/15/2019‐ 5/31/2019

3/15/2020‐ 5/31/2020

Numbe

r of D

eals

DECREASE IN VENTURE FUNDING MARKET

Venture Capital and angel deals completed during the COVID-19 crisis are down 22% by deal volume, but only 14% by total invested capital year-over-year

Deal volume in Q1-20 is down significantly, but appeared normal by capital invested which was skewed by mega-deals over $100 million

Source: PwC / CB Insights MoneyTree, PitchBook

$25.3$29.7

$40.1

$26.9$30.9

$28.6

$23.3$26.4

1,7741,608 1,492

1,5111,650

1,5331,399

1,271

$0

$10

$20

$30

$40

$50

$60

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q3'19 Q4'19 Q1'20

Investmen

ts (U

SD $bn

)

Numbe

r of D

eals

Investments ($bn) Number of Deals

‐14%

‐22%

CHANGES IN EARLY STAGE INVESTMENTS

The number of deals between March 15th and May 31st are down substantially year-over-year at the angel/seed stage and early stage, but are up in the late stage

Source: PitchBook

$9.5

$8.0

1,002

706

0

250

500

750

1,000

1,250

$0

$3

$6

$9

$12

$15

3/15/2019‐ 5/31/2019

3/15/2020‐ 5/31/2020

Deal Cou

nt

Med

ian Po

st‐M

oney Valua

tion (USD

$mn)

Angel & Seed

Median Post Valuation Deal Count

$39.4

$46.6

699

483

0

150

300

450

600

750

$0

$15

$30

$45

$60

$75

3/15/2019‐ 5/31/2019

3/15/2020‐ 5/31/2020

Deal Cou

nt

Med

ian Po

st‐M

oney Valua

tion (USD

$mn)

Early Stage Venture


$105.2

$481.0

549 558

0

150

300

450

600

750

$0

$150

$300

$450

$600

$750

3/15/2019‐ 5/31/2019

3/15/2020‐ 5/31/2020

Deal Cou

nt

Med

ian Po

st‐M

oney Valua

tion (USD

$mn)

Late Stage Venture


VENTURE CAPITAL - FUNDING TERMS

• Key takeaways:

• Fewer deals overall, with biggest impact at earliest stages, and valuations holding so far

• Valuations expected to decline, funding may be difficult to obtain at any valuation

15

Mergers & Acquisitions and Private Equity

16

WHAT IS HAPPENING TO TRANSACTIONS TODAY

• Transactions are still getting closed

• Timelines are extended as buyers wait to see the full extent of the impact

• Fewer transactions are coming to market

• Healthy businesses should continue with process – delayed start

• More prevalent opportunities for add-on acquisitions or minority investments for PE firms

• Strategic buyers are in the market being cautious buyers

17

9.9x

7.9x8.5x 8.9x 8.9x 9.0x 9.1x 9.4x

10.0x 10.0x9.5x

10.1x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Med

ian EV

/ EB

ITDA

Multip

le

TRANSACTION MULTIPLES OVER TIME

During the Great Recession, overall multiples contracted by 2.0x EBITDA or ~20% from 2008 to 2009

Geography: North AmericaSource: PitchBook

18

MIDDLE-MARKET TRANSACTION MULTIPLES

Multiples for middle-market transactions (deal sizes $10 million to $250 million) have increased over the last few years, from an average of 6.7x in 2015 to 7.4x through May 2020

Source: GF Data

5.9x 5.8x6.3x 5.9x 6.1x 5.7x

6.6x 6.4x 6.6x 6.9x 7.0x 6.9x7.8x

7.2x

8.2x8.9x

7.4x8.1x

9.0x 8.9x 9.1x 8.8x9.5x 9.6x6.7x 6.7x

7.3x 7.2x 7.2x 7.4x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

2015 2016 2017 2018 2019 YTD May‐20

TEV / E

BITD

A Multip

le

TEV: $10M ‐ $25M TEV: $25M ‐ $50M TEV: $50M ‐ $100M TEV: $100M ‐ $250M Average: $10M ‐ $250M

19

MIDDLE-MARKET DEBT LEVERAGE

Leverage available for middle-market transactions is in decline, reducing buyers’ ability to fund as large of a portion of a transaction with debt

Note(*): As of May 15, 2020Source: SPP Capital Partners

3.5x3.8x

4.0x3.5x 3.4x

2.9x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

5.5x

Jan‐16 Jan‐17 Jan‐18 Jan‐19 Jan‐20 May‐20*

Debt to

EBITD

A Ra

tio

EBITDA: Up to $10M

4.1x 4.0x4.5x 4.6x 4.6x

4.0x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

5.5x


Debt to

EBITD

A Ra

tio

EBITDA: $10M ‐ $20M

4.8x5.0x 5.3x 5.1x 5.3x

4.5x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

5.5x


Debt to

EBITD

A Ra

tio

EBITDA: $20M +

20

M&A ACTIVITY AND S&P 500 PERFORMANCE OVER TIME

Historically, M&A activity has closely followed developments in the broader capital markets

Note: S&P 500 Index Value through 05‐15‐2020Sources: IMAA, S&P Capital IQ

“Dot‐com Bubble“M&A Down ~36%

Global Financial CrisisM&A Down ~28% COVID‐19

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Inde

x Value

M&A Vo

lume

Recession Quarterly U.S. M&A Volume (4‐quarter rolling average) S&P 500 Index Value

21

M&A ACTIVITY DECLINED SHARPLY

With uncertainty in the market, M&A activity declined significantly from April & May 2019 to April & May 2020, and a number of high profile transactions were called off

Sources: S&P Capital IQ, WSJ

“Xerox Is Ending Hostile Takeover Bid for HP”“Coronavirus pandemic prompts copier maker to walk

away from challenging merger attempt” ‐WSJ

“L Brands, Sycamore Agree to Scrap Victoria’s Secret Deal”

‐ WSJ

“SoftBank Backs Away From Part of Planned WeWork Bailout”

‐WSJ

22

1,498

715

1,532

706

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

April 2019 April 2020 May 2019 May 2020

Numbe

r of A

nnou

nced

Tran

sactions in th

e U.S.

$0.6 $0.6 $0.6 $0.7 $0.7 $0.7 $0.8 $1.0 $1.2 $1.5$1.1 $1.2 $1.4 $1.5 $1.6 $1.6 $1.7

$2.0$2.3

$2.6

$1.7 $1.8 $1.9$2.2 $2.2 $2.4

$2.6

$3.1

$3.5

$4.1

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*

Balance (USD

$tn)

Dry Powder ($tn) Unrealized Value ($tn)

PRIVATE EQUITY FUNDS UNDER MANAGEMENT AND DRY POWDER

The capital available for Private Equity firms to deploy continues to rise faster than it can be deployed

Note(*): As of June 30, 2019Source: Preqin

$3.8tnGDP

Germany

23

PRIVATE EQUITY MIX OF INVESTMENTS OVER TIME

Strategies for Private Equity firms have evolved since 2005 with a major shift toward add-on acquisitions

Source: PitchBook

50% 46% 41% 41% 36% 37% 35% 37% 32% 32% 33% 30% 31% 29% 27%

32% 38% 43% 42%42% 43% 45% 45%

45% 48% 48% 50% 49% 52% 55%

18% 16% 16% 18% 23% 20% 20% 18% 22% 20% 20% 20% 20% 19% 18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Buyout/LBO Add‐on PE Growth/Expansion

24

PRIVATE EQUITY: THE CURRENT COVID-19 PLAYBOOK FOR NEW INVESTMENTS

Source: Company Websites & Newsletters

More Narrow Criteria…

• Increased focus on end-markets relatively insulated long-term from COVID-19, even if there is a short-term impact

• Reduced appetite for cyclicality

• Limited exposure to hospitality, travel, and other heavily impacted industries

But More Expansive Investment Strategy

• More flexible structure as traditional buyout firms consider non-control deals

• “Structured Equity”

• Expanded debt strategies with low and no amortization loans

• Heavy focus on add-ons for healthy portfolio companies

• Lower EBITDA and size thresholds

• High demand for ways to invest in quality companies as most firms are not distressed investors

25

IN SUMMARY

• Macro factors still point to a positive M&A environment in the medium term

• Leverage is down

• Interest rates remain low

• Low tax rates (for now)

• Quality targets are still scarce

• Active firms want to transact

• Transactions occur in every market

26

What Now?

27

STRATEGIC VALUATION STRATEGIES TO DEPLOY IN A DOWN MARKET

• Our clients and their advisors are already optimizing tax strategies that take advantage of a temporarily reduced value environment

• Strategies for consideration:

• Generational gifting – private company ownership/wealth transfers

• Current administration raised lifetime gifting exemption from $5.5 million to $11.2 million in 2017 TCJA (double for couples); expires in 2025

• Any changes to tax laws in coming years likely to be adverse, particularly if administration changes following election

• Equity compensation via IRC 409A – non-cash compensation strategies aimed at retention at a time when companies may have cut cash comp

• Minority owner buy-outs – a good time to clean up the cap table

28

SHOW ME YOUR EBITDAC: LIQUIDITY OPTIONS

FOR PRIVATE COMPANIES

Earnings Before Interest, Taxes, Depreciation, Amortization & Coronavirus (EBITDAC)

• Scenario #1: You are a 68 year old owner who was looking to sell in 2020.

29




• Scenario #2: You are nearing retirement and are 3-5 years out from the sale of your company.

30




• Scenario #3: You still have a long runway ahead of you but know at some point 10+ years out you would like to sell your company.

31

ACTIONS TO CONSIDER TODAY FOR YOUR BUSINESS

Your

BusinessStrategic

Planning

Successorship

Strong

Financials

Employees &

Culture

Marketing &

Brand

Intellectual

Property

Technology

Insurance

32

Navigating an Advantageous Position for your Business

Questions?

33

WE ARE HERE TO HELP

The information provided herein does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. Readers of this presentation should contact their attorney to obtain advice with respect to any particular legal matter. The information was updated as of June 10, 2020 and we recognize it may change. Please contact your Aldrich Advisor for the most up to date information for your situation.This session is being recorded and may be redistributed or replayed.

34

Brian Andreosky, CEPASENIOR BUSINESS ADVISOR, ALDRICH CAPITAL

[email protected]

Carl Pinkard, CFP®, CEPAPARTNER, ALDRICH CAPITAL

[email protected]

Naomi DernerMANAGING DIRECTOR, VANTAGE POINT ADVISORS

[email protected]

Eliot PetersMANAGING DIRECTOR, RA CAPITAL ADVISORS

[email protected]

Contact Us!

Email: [email protected]

Phone: 877.620.4489

RA Capital Advisors LLC, Member FINRA and SIPC

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