M&A: Private debt market ‘keeping folks in the game,’ Solomon Partners CEO says

Solomon Partners CEO Marc Cooper joins Yahoo Finance Live to discuss the M&A and private equity market, economic uncertainty, and the areas of opportunity for deal-making.

Video Transcript

- Welcome back, everyone. With inflation still surging and Wall Street weighing the chance of a dramatic statement from the Fed, the deal-making environment, it continues to face some headwinds. Despite M&A activity looking somewhat better in August, it remains down for the first half of 2022. To chat more on this, let's bring in Mr. Marc Cooper, Solomon Partners CEO. All right, hanging with Mr. Cooper this morning.

Marc, first and foremost, when we think about the first half of this year and what we saw in M&A activity and whether that will actually improve or has shown any signs of improving in the second half. What are the expectations that we could be keeping an eye on as a benchmark?

MARC COOPER: Well, I think the first half was influenced significantly by the incredibly bullish market in 2021. So a lot of that was carryover. So I think second half will probably be down over 2000-- or over the first half in 2022.

But it's not as if the markets, in my view, has changed so dramatically. I think the high-yield market has been closed most of the year. The IPO market has been closed most of the year. So some of the headwinds have been with us for quite some time. And they continue.

But doesn't mean we're not seeing transactions getting done, that there isn't a lot of activity, that there is an appetite that people aren't engaged. And they are. It's going to be just a continued sort of tougher market, I would say, but not a market that you can't see transactions complete.

- Marc, it's Julie here. The market has changed in one way in that it's gotten cheaper by a lot of different metrics, right? We have seen valuations come down. What does it say to you that we have not seen more activity of companies coming in, or private equity, for that matter, coming in, looking at those valuations and saying, ooh, it's attractive there? Does it mean that they are expecting things to get cheaper?

MARC COOPER: So there are two elements to that. There's the element of the company and the board. So the boards-- how do boards feel about selling at 52-week lows? And the boards view current stock prices as being momentary.

And, in fact, when the markets come back, or when the uncertainty of increasing interest rates have a positive effect on people's view of valuation, does the market come back? So that's just an issue of it's just been too soon since the market has dropped. And so you need some time for boards to be comfortable that the current value is the value that they should, in fact, trade at.

The second issue is, as you look at public companies-- and it depends on size-- you don't have a very robust high-yield market. Now, what you do have, which is very unusual-- at least unusual for historic downturns in the market-- you have a very strong private financing market, who have financed public transactions and will finance public transactions.

One of the very reasons why our market is continuing to be reasonably active and robust is because of that private capital market-- private debt market. And that is really keeping folks in the game. Without that, if you look back at 2008, when that market was in its nascent stages, the M&A market closed for a while.

So I think the issue is, you've got to give it a little time before, I think, boards are going to be comfortable with the price being something that is transactable.

- Marc, while we have you here, some news out this morning from the "Wall Street Journal" that there's going to be a third Vision Fund that's being considered by SoftBank. What is the appetite of investors to actually pour into that Vision Fund, considering the performance of the first two iterations of their Vision Fund?

MARC COOPER: You know, it never ceases to amaze me. The expectation of the future doesn't necessarily have anything to do with the past. So he's obviously a very brilliant guy, Masa Son, and he's done quite well in his career.

And maybe you can make the argument that now is a better time than a bunch of years ago when he started because values are so low. But I would say, if there's one sector that has seen a much steeper falloff in the private equity community, it's been the venture world.

So, you know, again, one could argue that this is a good time to buy because it is so cheap. But as you know, there's a high correlation to values and private equity to the stock market and to IPO markets, which, as you know, are nonexistent. But I would think-- I would think that would be tough.

- And Marc, just quickly here, before we leave you-- as activity eventually starts to pick back up, are there particular sectors that you think are going to be busier than others?

MARC COOPER: So, interestingly enough, right now there are sectors that are busier than others. And there are sectors that are still getting multiples that are of a 2021 vintage. You know, 20 type multiples for businesses-- EBITDA multiples, that is. And those are companies that are noncyclical and are very growthy and are very stable.

And then sort of the cyclical, consumer-driven, supply-chain oriented businesses are the ones that are tough transactions to do. But we're seeing still a very robust market in the technology sector and in software. So that is almost rivaling the numbers of last year.

Healthcare business services have been a great sector. In fact, we have a new team out in Chicago, which has been doing fantastically well. But again, even within business services, there's the "have and have nots." The ones that are getting the real interest and the high multiples are the ones where are non-discretionary.

Anything that's discretionary, anything that's recession-oriented or inflation-oriented, that's the one that's going to be put to the side. People are going to make the bet that we're going to have a tough economic cycle for a period of time.