Speeding Through the Credit Crunch
December 6, 2007
Dan Reid runs the transaction advisory services group of Grant Thornton, a global accounting, tax and business advisory organization firm. Prior to joining Grant Thornton, Reid ran TAS groups at firms like Duff & Phelps and Arthur Andersen. Reid works out of Grant Thornton's San Francisco office. He talked to PrivateEquityCentral.net about how the current credit problems have affected his clients, and what to look at in the upcoming year of M&A.
PrivateEquityCentral: First of all, tell us about what the transaction advisory services group does. Dan Reid: We advise clients primarily on due diligence on transactions. A majority of our client base are private equity firms. In addition to providing the transaction advisory services, we also coordinate our overall services provided to private equity firms from portfolio company services on up through partnership audits and then partner audits.
PEC: How would you summarize 2007? DR: Rapid. Incredibly fast-paced. We saw that once the liquidity crisis, credit crunch - whatever you like to call it - hit, it did not necessarily slow down the middle market (where we spend a lot of our time) as much as it did the bigger deals. It did make people stop and reconsider their approach a little bit so there was a more deliberate approach. But it still is working at a very quick pace. When you’re running at 120% and you slow down to 100% it’s really tough to call that a slow-down.
PEC: How long do you think this credit crunch is going to last? DR: I don’t know, at the mega-deal level. I don’t have a real view of that. I think it’s going to take a little bit longer to sort out. If you look back historically, when we’ve
run into these types of situations they haven’t been overly long-term. But even if it’s only 16 months that seems like a real long time if you’re right in the middle of it. I really don’t know how long it’s going to last at that level. Most of our clients don’t do the high yield bids so it just hasn’t hit them as much. The increased focus on financing and the importance of having lenders involved, I think that’s going to have a longer impact in staying with the business, but I don’t necessarily think that’s a bad thing.
PEC: What do you see as the hot place to invest heading into 2008? DR: Right now at the macro level, inbound transactions are very hot. Where the dollar is, foreign investors are finding a robust market to come into the U.S. Within the U.S., in the private equity sector, our clients tend to diversify quite a bit across the board. If you look at manufacturing, the rust belt companies have always been strong. We’ve seen a few more deals in the healthcare industry. Oil field services and anything oil field/energy related has been robust in the last four or five months and I think that will continue.
Certainly media areas of technology are going to develop, though I’m not going to pretend to be the prognosticator when it comes to the technology areas. We tend to find more activity in more focused areas, which ones will stay I’m not 100% sure, but we’ll probably see a few more deals in the healthcare industry and the energy industries.
As far as taxes and private equity and what’s going to be the hot topic for 2008, I think the No. 1 issue will be the carried interest and whether or not a tax is imposed on the carried interest. Certainly that could happen before the elections. A lot of it will depend on whether they need that perceived revenue raise from it and how that will play out. I don’t know exactly what form it iss going to take, and there are a lot of issues that need to be worked out on that. We have not identified at first blush what effect it will have on small business owners who invest in a partnership.
PEC: What are your predictions for 2008? DR: As we go into 2008 people are aware that we’re not in a market anymore where we’ll be able to finance a deal and get it completed. We’re in a market where you have to go into the deal making sure you’ve got your financing sources lined up and knowing how that’s going to play out. We’ve really seen a lot more early involvement of the banks and throughout the whole process, and a lot more interest by the banks in the results of the due diligence. Not that they weren’t involved before, but earlier involvement and more active involvement. I think we’re going to see that stick around for a while, and again, I don’t think that’s a bad thing.