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Despite wild daily swings in public equity markets, emerging global economic headwinds, and geopolitical uncertainty, merger and acquisition and financing activity involving privately-held companies in the US remains strong, especially within the intelligent building sector.

Abundant equity and debt capital are available to private business owners to fund growth initiatives, and private equity investors (fueled by nearly $570 billion of unused and available capital commitments and strategic acquirers with under-levered balance sheets are providing a highly liquid market for business owners considering an exit.  According to Pitchbook, this abundance of capital, coupled with accommodating low interest rates and the willingness of debt capital providers to support transactions, has driven average middle-market transaction valuation multiples of Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) from approximately 7.0x EBITDA in 2009 to nearly 12.0x EBITDA in 2018.

Private capital markets continued their strength during the first half of 2019.  However, we believe that business owners considering a financing transaction, or an exit, should be mindful of where we are in the macroeconomic cycle and that buoyant and accommodating private capital markets may not continue indefinitely.  For business owners in the intelligent building sector, we cite the following when considering the timing for accessing the private equity and debt markets for growth or considering an exit.

The Positives:

• Highly Engaged Customer Base:  Property developers, owners, and management companies are highly engaged in the market from a technology incubation standpoint and as investors in companies and technologies either through their own private equity arms (e.g. Brookfield Ventures, JLL, Rudin Ventures, and Starwood Capital) or as limited partners in institutional funds (e.g. CamberCreek, Fifth Wall, Greensoil, and RET Ventures).  This relationship is unique in the power and industrial markets and has helped contribute to the momentum in the sector.
  
• Unprecedented Interest in the Sector from Venture and Growth Equity Investors:  According to CRETech, nearly $9.6 billion was invested in PropTech in 2018 and $14 billion invested during the first half of 2019.  This investor interest has stretched valuations for highly attractive issuers with solid technology or service capabilities that serve large addressable markets.
• Abundant Debt Capital and Low-Interest Rate Environment:  While the traditional bank market continues to be supportive of financial and strategic acquirers, there has been an explosion of non-bank lenders in financial markets, which now account for over 90% of new loan activity.  These include institutional debt funds, hedge funds, and publicly traded Business Development Corporation (“BDCs”).  The abundance of debt capital has led to an unprecedented range of structural alternatives for business owners as well as acquirers and is supported by the aforementioned attractive interest rate environment.  Given the prospect of a global economic slowdown, we expect the low-interest-rate environment to continue as central banks around the world signal continued easing in monetary policy.
  

• Tremendous Amounts of Later Stage Private Equity Capital:  As previously mentioned, the amount of private equity capital commitments sitting on the sidelines waiting to be invested is at an all-time high.  The intelligent building market remains of particular interest to late-stage private equity investors given the success of completed sale transactions such  as Distech Controls (Desjardin Capital, EnerTech Capital, Hydro-Quebec Capitech, and several others) and ServiceLogic (Sterling Capital Partners), as well as ongoing consolidation efforts including Albireo Energy (Huron Capital Partners), Convergint Technologies (Ares Capital), and Kele (Snow Phipps).
  

• Attractive Transaction Multiples:  Our index of the 13 publicly traded technology providers and 5 publicly traded building technology services providers in the intelligent building sector trade at 10.7x EBITDA and 11.2x EBITDA, respectively.  Strategic acquirers’ views on target valuations are strongly correlated with their own trading multiples, and these companies are now trading near historic highs as a multiple of EBITDA.
  

The Negatives:

• Potential for Macro-Economic Slowdown:  Geopolitical and associated risks appear to be having an impact on global growth and the outlook for US GDP growth for 2019 and 2020 has deteriorated. In June 2019, the outlook for GDP growth for 2019 and 2020 was 2.1% and 2.0%, respectively, down from the December 2018 outlook of 2.3% and 2.0%, respectively. While a slowing in growth does not necessarily signal a recession, it is important to recall that it took three years for the economy to get back to any meaningful levels of growth following the 2008/2009 recession after registering a negative 2.8% annualized real growth rate in 2008.
  

• Impact of a Slowdown on Transaction Multiples and Deal Volume:  During the Financial Crisis, middle-market transaction multiples involving private equity investors contracted from 12.0x EBITDA (2008) to 6.9x EBITDA (2009) and middle-market transaction volume involving private equity investors dropped by 75% from $282 billion in 2007 to $77 billion in 2009.   In addition to overall liquidity constraints during that time period, interest in merger and acquisition activity waned as many strategic and financial buyers were focused on managing their own business portfolios and operations.
  

Our Conclusions:

While England & Company is not calling a top in the market or any type of dislocation like we saw in 2008, we do believe that we are very long in a highly accommodative cycle in the private capital markets and it is definitely our feeling that market conditions will not appreciably improve from their current level.  Therefore, if you are considering a capital raise to fund an acquisition or organic growth initiative or even an exit, we feel that there is no time like the present to explore your options.

About the Author:

Glenn Tofil is a Managing Director with England & Company.  He focuses on power, industrial, and infrastructure technology and services markets.  Glenn has significant experience working with shareholders and executive teams of middle-market companies to create long-term value through mergers and acquisitions and private capital raising transactions.   He can be reached by email at gtofil@englandco.com.

About England & Company:

With offices in Houston, New York, and Washington, DC, England & Company is an independent investment banking and advisory firm dedicated to the middle market. Since the founding of England in 2003, the firm has provided honest and effective advice on mergers and acquisitions, private capital raising, financial restructuring, fairness oinions and valuations, and strategic advisory to the executive teams, boards of directors, and financial sponsors of public and private companies.

Please visit England & Company’s website for more information on our firm and to download the latest edition of our Growth Wire Report on the Intelligent Buildings Sector.