00:00We had Paul Taubman on the show the other week, and he basically said it's time to put away the
00:04pom-poms for 2026.
00:06That deal activity might not be as robust as we expected. You're still bullish for this year. Why?
00:12Yeah, look, I look back at 2025 as a good example.
00:17We went into the beginning of 2025. I'd say the world was generally optimistic about the M&A market.
00:23Tariffs came in April, and people were saying a similar thing, which it looks like 2025 is not going to
00:28be a good M&A market.
00:29And then following April, it turned into one of the most active, if not the most active, second halves that
00:34we saw.
00:35So it's very hard to predict, but we think in many year cycles.
00:39And I always think about, in 2023, I thought about 10% to 15% up market in 2024, and
00:46I felt similarly about 2025.
00:47I'd say I feel similarly about 2026, the fundamental underlying drivers.
00:52So the demands to put capital and invest capital, the desire for corporates to strategically reposition, which really came out
01:01of COVID.
01:02Because coming out of COVID was certainly a period where there were times you couldn't get things done.
01:06And coming out of COVID, boards and shareholders said to management teams,
01:09if there's something that you think you should do to position you for the next, not 10 weeks or 10
01:14months, but 10 years or 20 years or 30 years, you should seriously think about doing it.
01:20And there's going to be periods, whether it be when April of 2025, when tariffs happened, the period after Silicon
01:26Valley Bank, that it's going to be harder to get things done.
01:29But again, when you think in one, three, five-year M&A cycles, it's not about a given quarter.
01:34So overall, I still feel relatively optimistic about 2026.
01:38Optimistic enough that it could meet or exceed 2025?
01:41Does the pipeline look robust enough for that?
01:43The dialogue certainly do, but I'm a data person, so let's look at the data.
01:48Sure.
01:48The beginning of 2026, and it's really been a tale of two cities.
01:52In the $5 billion and up category, it's been, if not the most active year in history.
01:58In fact, exceeding what we saw in 2021 in the $5 billion and $10 billion and up categories, which is
02:05surprising to a lot of people.
02:06Where you've seen a dramatic contraction, we'll talk about private equity in a second.
02:10Where you've seen a very substantial contraction is in the smallest transactions, down materially.
02:15In addition, private equity is down 20-plus percent.
02:18Private equity is typically 35% to 40% of the M&A market.
02:21It's running at about 24%.
02:23So it's a little bit of a tale of two cities, which kind of gets back to that 10%
02:27to 15% up year.
02:28But in the large transactions, it's pretty dramatic.
02:31How much, especially for those smaller deals and private equity, how much were funds, were companies waiting for a window
02:37when there'd be lower rates?
02:38And the fact that it looks less likely now with inflation concerns over war in Iran, is that altering the
02:44outlook?
02:45So I think it's less about sitting around and waiting for rates.
02:48But if you take the private equity universe and the monetization, as we've all talked about for a period of
02:53time, of the substantial number of portfolio companies,
02:55it's really about when do valuations reach a point that it's attractive for private equity to monetize.
03:01And frankly, they've extended duration.
03:03They've had vehicles to tell their investors, be patient, and let's wait and see if there's a better market.
03:10Continuation vehicles.
03:11Other things have provided that vehicle for extending duration to where they're hoping to get to a point where valuations
03:17are attractive.
03:18So that's a big part of it.
03:20And again, whether it's the war that we talk about, whether it's interest rates, it's really about when do valuations
03:25reach a point that's attractive for private equity to monetize.
03:27Are we getting close to that at all?
03:29Well, there's two countervailing factors.
03:31One is the longer it goes, the more pressure they have from investors to return capital.
03:36Valuations, obviously, in certain sectors are doing very well.
03:39And we've seen a rotation in capital into what I call steel-in-the-ground industries, where it's less exposed
03:46to AI.
03:47It's, frankly, putting steel in the ground.
03:49It's food businesses.
03:50It's core demand.
03:51So we've seen a rotation in capital.
03:53So in those businesses, you've seen valuations and you've seen a fair number of transactions.
03:57In the ones where it's hard to think about what is the terminal value, which we'll talk about, which is
04:02the big question about valuation.
04:03We've seen that in software, what is the terminal value.
04:06It's harder.
04:07And so I think we'll expect to see more.
04:08To that point, are you equally as optimistic about software deals getting done now?
04:13Hard to predict.
04:15And I think software is a very big universe.
04:17And it's obviously been an extraordinary category for investors and private equity and new company formation.
04:22There's still a whole raft of new companies.
04:24And if you look back at the Internet era in 2000, many of the winners didn't start until many years
04:31after that.
04:32So we're just getting into that.
04:33So I think there's going to be new company formation.
04:35There'll be some natural transitions.
04:37Obviously, the impact of AI in that entire universe is to be seen, but it's clearly having an impact on
04:42valuation.
04:43What about the impact of AI on the entire corporate universe?
04:46You know intimately well CEOs, boardrooms.
04:49Are they prepared for this moment?
04:51Do they have the expertise to guide them through it?
04:53So it's really interesting.
04:54If you look at some of which were crises and some of which were just business developments, COVID.
05:00You had health experts in the boardroom who could talk about the impact to society, the impact to customers.
05:07The financial crisis.
05:08You had lots of ex-CFOs sitting in boardrooms who understood credit and understood what it meant to have a
05:14credit cycle.
05:15AI is really the first what I'll call impactful situation.
05:19For some, it's existential.
05:21It's obviously going to have a big impact on everyone, where there's not a history of experts sitting in the
05:26boardroom.
05:26So it's really hard.
05:27It's not that anyone did anything wrong.
05:29It's just it's exploded in terms of its impact.
05:32There's really not a lot of history.
05:34And so boards and management teams in all industries are grappling with, all right, who are the experts?
05:39How do I get expertise to think about how do I think about business planning?
05:43How do I think about doing M&A?
05:44How do I think about setting up my company?
05:46Where do I invest?
05:47And so all that's going on right now.
05:49So it's not necessarily just an M&A dialogue.
05:51It's really a dialogue about how do you build, run, and do M&A for companies and for boards.
05:56Stephan, before you go, we have to spend a moment with private credit because it is a moment where it
06:01has been dominating headlines of redemptions, of calls for certain amounts of defaults.
06:06Are you concerned about this key pillar of financing for deals, that there could be a scenario if some of
06:13the worst of predictions come true, that a key area of financing starts to dry up or at least liquidity
06:18starts to become more thin?
06:19I start with the foundational piece that there's incredible amounts of capital sitting with investors, public equity, private equity, public
06:30debt, private debt.
06:31That quantum of capital is substantial.
06:33Looking to invest into transactions, into companies.
06:37There's lots of ways that that capital can reach its destinations.
06:41Syndicated financing has been around for a long time.
06:43It hasn't gone away with private credit.
06:45It still remains very viable.
06:47Private credit was a vehicle and a pathway for capital to get invested into situations.
06:51So the vehicles in which capital may invest may ebb and flow depending on markets or depending on redemptions or
06:57depending on all the things that you described.
06:59But intrinsically, as you think about over periods of time and over cycles, tremendous amount of capital looking to invest
07:05in great opportunities.
07:07That's not going to change.
07:08As long as you have that desire of intrinsic and basic capital to get invested, it's going to find the
07:14right vehicle which the market is supporting.
07:16But getting back to where we started this, it sounds like that capital might not be making its way and
07:20finding its way into smaller companies.
07:22Is that fair to say that still some tension exists on that end of the spectrum?
07:26I think there's definitely some tension.
07:28There's still tons of capital going in.
07:30In fact, LBOs of all sizes are at all-time high numbers of leveraged buyout transactions, which is surprising to
07:35a lot of folks.
07:36So you might have fewer monetizations, but you still have lots of investment going on.
07:41M&A on the small company side, you might just say big companies are focused on the larger transactions because
07:46they're able to get them done.
07:47And that's why we've seen a record number of transactions that may flow back to focusing more on, you know,
07:52string of pearls transactions where you put four or five or six transactions together.
07:56But one thing is for certain when you have large pools of capital who want to invest and need to
08:02generate returns for their investors, they're going to find the opportunities, whether they're small companies, medium or large.
08:06And again, the exact path will ebb and flow, but focus on the fact that there's large amounts of capital
08:12that wants to invest.
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