By James Lisi
From Feb. 20 to March 20, the bond risk premium jumped two points. This jump was larger than any previous move over a one-year period. Well-regarded economists are forecasting 20 percent to 35 percent fall in Gross Domestic Product for the next few months.
We have just exited the best market for selling businesses that I have seen. Low interest rates, stable economics and steady growth led to high asset prices. Market multiples for businesses of $5 million to $25 million of revenue peaked in the 5.5x to 8.0x value range. If history is a good guide, multiples can be expected to fall into the 4x-6x range for the next four years. Unfortunately, this will be based upon lower revenues — so a return to the values available in 2019 may not come for another decade. The outcome for you will depend upon industry, company growth rate and the speed of economic recovery. It is a good time to sit down with your wealth management professional and reassess your plans.
At the venture capital level, Pitchbook reported that all private deals cancelled this last week. My colleagues and clients dealing with private equity groups report that PE has also shut down their deals except for two niches, industrial distribution, and those businesses benefitting from the shelter-at-home orders. Think of firms like Netflix and Nintendo. And even in these cases, the deals going through to close were funded by the end of January and are being asked for 20 percent discounts. Without the ability to meet owners face-to-face, even these PE teams will run out of pipeline soon.
Going forward, PE will benefit from the lowest borrowing costs on record. So, look for deals to resume once things go back to normal. Some PE firms are excited and bullish … and some are going to struggle. Most have set aside money to make add on investments to shore up distressed portfolio companies. However, those with dry powder will be actively looking for distress situations. Blackstone just finished raising the largest fund ever ($29 billion) to seek out distressed opportunities. The game will be to find good companies that come out of the contraction strong, or to find companies that are distressed and must sell to a strong buyer.
• James Lisi is the owner of Santa Barbara Valuations.