DeepSummary
In this episode, Scott Becker interviews Matt Wolf from RSM to discuss the current state of the IPO market and the rise of private equity firms taking underperforming public companies private. Matt explains that a significant portion of companies in the Russell 2000 index are not generating sufficient returns above their cost of capital, making them attractive targets for private equity buyouts.
Matt suggests that private equity firms have the opportunity to optimize these companies' operations and capital structures, creating value for their investors. He also notes that the financing environment for these deals has become more favorable, with private equity firms able to negotiate lighter covenants due to the larger equity portion of the funding.
The discussion also touches on the potential impact of the Federal Reserve's upcoming rate cuts on the capital markets and deal activity. Overall, Matt and Scott explore the dynamics driving the trend of taking underperforming public companies private and the opportunities it presents for private equity firms.
Key Episodes Takeaways
- A significant portion of companies in the Russell 2000 index are not generating sufficient returns above their cost of capital, making them attractive targets for private equity buyouts.
- Private equity firms have the opportunity to optimize the operations and capital structures of underperforming public companies, creating value for their investors.
- The current financing environment is favorable for private equity buyouts, with firms able to negotiate lighter covenants due to the larger equity portion of the funding.
- The Federal Reserve's upcoming rate cuts could potentially impact the capital markets and deal activity, with some market participants waiting for the first rate cut before making moves.
- Evaluating a company's return on invested capital and cost of capital is crucial for private equity firms in identifying potential take private targets, especially in an environment of positive real interest rates.
- The trend of taking underperforming public companies private is driven by the increasing difficulty in finding quality assets for traditional private equity investments.
- The dynamics of the IPO market and the performance of public companies across different indices, such as the Russell 2000 and S&P 500, are discussed as factors influencing the take private trend.
- The potential for operational improvements and cost savings by taking a company private is seen as a key value creation opportunity for private equity firms in these deals.
Top Episodes Quotes
- “Recently we've seen 50 60% of the Russell 2000 companies really not generating sufficient returns over and above their cost of capital.“ by Matt Wolf
- “And as a sponsor, if you can optimize that, you can create significant value for yourself and your lp's. And that's very, that's going to be a very attractive play, I think, going forward, especially as firms have to look outside of their traditional scopes, like where they traditionally look for quality assets as they try to broaden their scope of deal flow to deploy that capital, because it is becoming more and more difficult to find quality assets, particularly for some investment theses.“ by Matt Wolf
- “There was a really fascinating report issued by Moody's last week. They essentially said that private equity buyout loans, compared to previous years and cycles, have actually become fairly covenant light, which really surprised me.“ by Matt Wolf
- “I'm curious to see, I should say, what private equity buyouts will look like there. It seems to me like it's a ripe market for take privates.“ by Matt Wolf
- “Absolutely. Yep. And again, I think in this environment of positive, real interest rates, the way to think about that, and it's very easy to do with a public company, obviously, we have all the information. So looking, okay, what is the return on invested capital for this company, and what is the cost of that capital for that company?“ by Matt Wolf
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Episode Information
Becker Private Equity & Business Podcast
Scott Becker
7/3/24
In this episode of the Becker Private Equity and Business Podcast, Scott Becker and Matt Wolf from RSM discuss the recent fluctuations in the IPO market, the rise in take-private transactions, and the current financing environment. They delve into the challenges and opportunities within the Russell 2000 and explore how private equity firms are navigating these dynamic times.