00:00Something about it feels really disconnected, the fact that there was such a massive first quarter and so much volatility.
00:06Is this current geopolitical volatility of stock swings every single day, concerns about energy markets, is it altering anything with
00:13M&A?
00:14You know, I would say across our team, there are certain sectors.
00:18So just to refresh you, we have 500 investment bankers focused on sectors.
00:22We have a technology team, health care, industrials, services, and aerospace and defense.
00:27Within those verticals, certainly there are some categories that have been impacted pretty quickly.
00:33Transportation logistics companies, an example, you know, fuel surcharges are up across multiple suppliers.
00:40You know, the idea around delivery times being delayed, insurance costs up, have driven a lot of activity in that
00:46space to be muted pretty quickly.
00:48On the flip side, other sectors are performing quite well and still winning deals and moving forward.
00:56Industrials is an example, companies exposed to petrochemicals.
00:59There's been pricing elevation across polyethylene, polypropylene, packaging, bottles, etc.
01:05But they're passing a lot of that on to the consumer still.
01:08So our pipeline, our engaged pipeline right now of live mandates is at a record level.
01:14You know, if these energy prices remain high for a sustained period, we will certainly see some decrease of activity
01:21in some of those verticals as well.
01:23Is there a specific time period where that holds true?
01:27What does it take to derail some of that?
01:29Is it months?
01:29Does it need to carry through through the rest of the year?
01:32What is sort of the barrier to halting these?
01:35I think I think that, again, varies by sector, but certainly there are some sectors that will see that pain
01:39reflected more quickly than others.
01:42Flip side, you know, we'll do about 200 M&A deals a year.
01:45The average transaction size, call it 200 to 2 billion.
01:48Our average deal size is about 500 million.
01:51Private equity is a big piece of that in terms of the investor base.
01:54There's almost been a rotation of investment appetite away from things for the time being, from things like software and
02:01tech and into what we could call essential services, HVAC services, facility services, infrastructure services, environmental services, more human capital
02:10intensive type businesses.
02:13Capital deployment in those categories is actually accelerated.
02:16And we have that HVAC IPO coming up to Madison Air that that was announced this week.
02:20I know that you've also been busy traveling and you've just come back from Europe.
02:24What are clients out there saying?
02:26Because it is a region that is much more exposed to an energy shock coming out of the Middle East
02:30than the U.S. is.
02:31So I was in continental Europe for a couple of days and then also the Nordics last week.
02:35And I met with probably 30, 25 to 30 private equity firms.
02:39The biggest topic that came up across all of these investors in that ecosystem was how do we get into
02:44defense investment?
02:47The friction between the U.S. and NATO has certainly driven up defense spending across Europe.
02:52There are some private equity firms over there who kind of led the way into the defense spending and they're
02:56seeing their businesses kind of double, triple in performance in a short amount of time.
03:00If you think about the U.S. versus NATO, European countries, that trend in Europe right now is pretty pervasive.
03:06And if you think about a $1.5 trillion budget coming across in the U.S., certainly the A&D,
03:11aerospace and defense appetite in the U.S. is pretty strong as well.
03:15We have been on about 15 IPOs or equity issuances in the U.S. tied to aerospace and defense over
03:21the last two years.
03:22That's almost five times what we would normally do.
03:25We're going on the road with two today that should price next week.
03:28So investment in aerospace and defense, primarily on the defense side, certainly on the commercial side, fuel costs are impacting
03:34the business a little bit.
03:35But on the defense side, there's a pervasive appetite across the U.S. and Europe to up investment in defense
03:41spending.
03:42Just on the point of the commercial side, you mentioned this as well with some of the infrastructure logistics companies,
03:47that they can pass the fuel surcharge through to consumers, through to customers.
03:52How much room do they have to do that at the moment?
03:55Because it is this environment where inflation has been above target for 60 months now.
04:00There is a lot of price fatigue.
04:02How much wiggle room is there in margins right now?
04:05I mean, I think they are attempting to do that.
04:06Our clients, a lot of them, even in the public markets, they're attempting to pass that through as we speak.
04:11If you think about even the T&L providers that are out there, FedEx, UPS, the United States Postal Service,
04:16Amazon, they've all come out and said we're doing fuel surcharges right now.
04:19That's getting passed along to the consumer.
04:22On the industrial side, certainly passing along as well.
04:24There will be a breaking point where at some point these companies are going to have to absorb at least
04:28some or maybe all of the price inflation that occurs.
04:31My fear, my concern, I guess, would be heightened energy prices for a sustained amount of time.
04:38The input costs ultimately drive inflation inside of our economy.
04:42The Fed, who is continuing to talk about maybe reducing interest rates in the future, which is good for M
04:46&A, good for equity capital markets,
04:48maybe even flips and start saying we're going to raise rates.
04:50And we saw that play out in 22, 23.
04:53Interest rates going from zero to 550 basis points.
04:56There's a 35% reduction in M&A volume over that type of rate.
04:59I just wonder if, just quickly here, Max, you're almost out of time, but if this is a moment of
05:02tension for your private equity clients
05:03that are sitting on aging assets and need to sell it and are now facing more volatility and perhaps rates
05:09that aren't coming down.
05:09Yeah, it is.
05:10And, you know, we talked about this last time I was on, 30,000 portfolio companies out there owned for
05:15an average of seven years.
05:17DPI is not going away.
05:18The need for LPs to get capital back from the GPs is there and it's staying.
05:22And so all these different products that have come out, the secondaries, the continuation funds, those continue to be pretty
05:26pervasive.
05:27I saw a stat, 14% of all the exits in the U.S. last year were through a CB,
05:33and 80% of all the largest GPs have done a continuation fund as well.
05:36So I think those products will continue.
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