'Overall activity has been slowing down largely due to the elevated valuations': Analyst on coronavirus impact

Clearsight Advisors Analyst Arel Rende joins Yahoo Finance’s On The Move to discuss the state of mergers and acquisitions during the coronavirus pandemic.

Video Transcript

JULIA HYMAN: Arel Rende is Clearsight Advisors' analyst. He's joining us once again, as he has before, to talk to us about what's going on in that space right now. Arel, it's good to see you. What are we seeing happen in private equity, right? Because one would think that deals, on the one hand, would be drying up right now. On the other hand, are valuations coming down, so perhaps there are some bargains being snapped up on the part of PE?

AREL RENDE: Definitely. Thanks for having me on, Julia. And you're exactly right on both fronts. Now that the first quarter of 2020 is over, we're starting to see some of that data roll in. And as Axios reported just a few days ago, there was a decline from 2019 in both the dollar amount of M&A activity and the number of deals. And the private equity community has had a lot to play in that in terms of in the middle market funds, who are dealing with transactions under a billion dollars. There was actually a slight uptick in the dollar value from last year.

What we're seeing is that a lot of these mega deals, these billion dollar plus transactions that some of the publicly traded firms are doing have either been put on hold or have been delayed. And that's largely because they just can't borrow the money to finance lease transactions right now. On the second point you brought up, it's true that distressed or opportunistic investors are going to be seeing opportunity through the dearth of demand to buy these companies, given that fast forward three or four months, there's going to be some overall acquisition targets on the market. And buyers aren't going to be willing to spend.

So while this is somewhat of a price correction in where multiples have been over the past year, we're seeing a broader continuation of a trend, at least on a deal metric basis that we've seen for the past two years or so. One point was that if you're looking at 2018 to 2019, there was about a 10%, 15% decline in deal volume. But whenever you look at that to Q1 of 2020, you saw a very similar trend in the low teens.

So while overall activity has been slowing down largely due to the elevated valuations that you mentioned earlier, it's largely at the top of the market. These mega deals aren't happening anymore. While the middle market and lower market transactions, while they're not happening as often, aren't as effective as the top of the market.

ADAM SHAPIRO: Hey, it's Adam Shapiro. I was curious-- what kind of-- there's going to be distressed assets out there that at least private equity might think it's capable of turning around. Are you seeing any of that yet?

AREL RENDE: Not just yet. And that's largely due to the financing aspect. Julia mentioned earlier that the Federal Reserve is starting to put in this second layer of troubled asset relief funds out. They're basically lending money to the banks right now so that they can continue to lend to their clients. So while that's not happening yet, we do foresee that happening in the future. These investors in a truly downside scenario are probably going to have to pick which of their investments they want to put their effort towards, and which ones they want to move into that distressed or opportunistic bucket. So I'd say fast forward three or four months, and that's when those opportunities are really going to be starting to come to market.

JULIA HYMAN: Of course, we've been speaking quite broadly here. But when you think about the segmentation or industries that seem particularly attractive right now-- and I don't want to use the term, but it is vulture investing, right? When you think about which industries could potentially be benefiting, are you thinking it's biotech? Is it real estate? Out of the landscape right now, where do you see an opportunity?

AREL RENDE: So the real opportunity is on two fronts, because this drastic shift in our day-to-day lives that the coronavirus has unveiled has, one, created opportunities in any and all virtual technology products. So any company that works in the cloud virtualization sector, any company that deals with teleworking or any sort of remote communication is going to be seeing opportunity now because they're on the uprise. They have more users now than ever before.

On the other hand, you do see some opportunity, particularly in consumer and retail that has been probably especially hit, one, because of a lack of discretionary income on behalf of consumers, a reduction in their confidence in the future. Second, due to the skyrocketing unemployment claims. And third and finally, just because people aren't allowed outside anymore. They can't go to stores and buy products.

So I'd say in those two sectors in specific, you're having one that's seen a major uptick, given an increase in users, and another one where those vulture investors, as you mentioned earlier, are really going to be seeking new opportunities, given that those are still valuable assets when things get back to more or less normal. But right now, they just need to power through this tough period.

JULIA HYMAN: What role then is PE playing when it comes to restructuring? And, again, maybe it's a little bit early to be having those discussions. But I'm guessing there are a lot of businesses that already need cash. And for one reason or another, perhaps the stimulus options that are available are either not right for them or not enough.

AREL RENDE: Yeah, I would not be surprised if the next 90 to 120 days saw an uptick in minority transactions and smaller deals where, instead of a business selling all of itself, it's just selling a part of itself in addition to raise some cash to last for the next six to 12 months. Additionally, you're right that restructuring has seen this form of resurgence, particularly on the debt restructuring side. Right now, there's this cash crunch.

And immediately after markets tanked a few weeks ago, we saw, in our own business that our clients and the businesses that we were working with, immediately pulled on their lines of credit. They were borrowing millions of dollars, and in the broader economy, trillions of dollars just to cover their cash expenses, because they didn't want the bank to pull that financing. So as that begins to dry up, even with the Federal Reserve putting its resources there, those funds that are more flexible in either offering some sort of riskier debt to companies or offering minority transactions may see an uptick, as well, as opposed to outright buyouts.