Robust M&A Activity, Aggressive Lending Practices Balance Capital Markets; Experts Reveal Reasons at 2015 BoyarMiller Capital Markets Forum
HOUSTON (Sept. 29, 2015) – While it’s a time for “caution” in the capital markets, merger and acquisition activity is strong and banks are positive and looking for growth investments, according to business finance experts at the annual “Current State of the Capital Markets” forum hosted by BoyarMiller, a Houston-based business and litigation law firm. About 200 attendees were updated on capital markets activities and topics included market volatility, private capital and commercial lending.
Steve Kesten, shareholder at BoyarMiller and chair of its business group, said the annual forum provides a capsulated view of financial activity in the markets and a reality check for attendees. “Our panel of experts tell it the way it is and share their insights about current activity and what we need to know looking forward,” said Kesten. “While we have been hit hard by the oil and gas industry here in Houston, there are deals being made and available capital to keep business activity moving in the right direction.”
The forum panelists included: Drew Kanaly, chairman of Kanaly Trust; Colt Luedde, managing director of GulfStar Group; and Brandon Annett, managing director and head of capital markets and syndicated finance at Texas Capital Bank.
Natural repricing under way
Drew Kanaly cited the five-minute precipitous 1000-point dive in the stock market on August 24 as the first significant decline of 10 percent or more in 46 months.
“It certainly got our attention but it is a normal occurrence,” said Kanaly. “In fact, what is not normal is the extended period of time between market corrections. This drop was not a big event; it happens very often.”
Kanaly reassured attendees that market spikes are quite common, but they indicate expectations looking forward, such as earnings remaining low. “A year ago, the consensus among Wall Street analysts was that we would see about 10 percent growth on S&P earnings. Today, it’s no growth,” he said. “If you remove energy stocks from the equation, the earnings number looks closer to seven percent.”
Kanaly referenced the correlation of stocks in the S&P 500 as being up significantly, but not as high as past peaks. “It looks like there were decisions being made in the market, about which stocks to own and which to sell, that fueled the spike and that the market was not just selling in general because people wanted out of the market. That is how we are describing the activity.”
But Kanaly also warned about widening credit spreads having a negative impact on stocks, which has been consistent throughout history. He also thinks there is another bottom to test and that it is time to evaluate the risk profile in investment portfolios to make necessary shifts, even though “what we are seeing is a perfectly natural repricing” in the S&P 500.
M&A deals moving forward
Colt Luedde of GulfStar Group told attendees that 2015 has been a strong year for merger and acquisition activity, mostly due to capital availability. He said M&A activity in the private sector has been quite robust because of the expectations of growth fueled by available capital.
“The first half of 2015 witnessed the strongest start that we have seen since the recovery; we are in the sixth year of what I would call a very strong and active M&A market,” said Luedde. “It is interesting that a lot of focus has been on foreign acquisitions, which is unusual by private equity buyers. The three biggest and most frequently cited countries in two recent surveys were Canada, the U.K. and China.”
Luedde says strategic corporate buyers generally outbid financial buyers the majority of the time.
The three industries that are experiencing a high level of M&As for different reasons are energy, healthcare and technology, according to Luedde. “Healthcare has new opportunities with the changing market and influence of the Affordable Care Act, and the technology sector is attractive because of its growth and how new technologies are being introduced almost daily,” said Luedde.
Regarding the energy industry, he believes now is a good entry point for investors. “We are seeing private equity buyers express interest in any sector of the energy industry, but they are waiting for about six to nine months,” said Luedde. “It seems that these investors feel there has not been quite enough pain the marketplace yet, so while they are interested, they will wait a little longer.”
GulfStar Group is not predicting a downturn in M&A activity, yet he advises clients to consider their timeline in evaluating a merger or acquisition. “If your timeframe is 10 years, a dip in the market is not going to have much impact on you. But with a 2 to 3 year timeframe, business owners need to do some evaluating to determine if current market valuation—at about seven times—is an attractive option.”
Banks are positive
The commercial lending market is strong, and banks are positive as they seek growth among healthy U.S. companies, said Brandon Annett of Texas Capital Bank. He punctuates that good news citing the lowest domestic unemployment rate—at 5.1 percent—since the great recession.
“Low vacancy rates and an expanding economy have driven real estate activity across all sectors,” said Annett. “Over the last three years, 22 percent of national banks have experienced more than 50 percent growth in their commercial real estate assets. Now this robust pipeline of new supply is beginning to temper lender activity toward new projects.”
Annett said that despite the dynamics of the oil and gas market, Houston’s new home sales remain ahead of last year’s pace and lead the country, although office leasing is slowing down.
“Traditional commercial and industrial lending activity is very strong, and there is fierce competition among banks for high-quality loans,” said Annett. “As a result, pricing and net interest margins are under pressure by the banks. For most industry sectors, the lending market is expected to remain aggressive with abundant liquidity and competitive terms.”
Annett said that despite the liquidity and heightened competition, middle market leverage multiples are down from last year—most likely reflecting guidance from bank regulators. He concluded that there is still M&A activity and a lot of money to put to work. “So what you’re really seeing as a result of this is that equity is a higher percentage of the capital structure for leveraged transactions.”
BoyarMiller is a 28-year-old Houston-based law firm comprised of two practice groups: business and litigation. The business group serves multinational companies, middle-market businesses and entrepreneurs in need of collaborative and strategic representation. The litigation group represents organizations of all sizes, from entrepreneurs to Fortune 500 companies, seeking to resolve complex business issues and employment disputes. See www.boyarmiller.com for more information.