The recent onslaught of M&A announcements has tilted the economic conversation towards "positive" animal spirits. Corporations and investors have decided to listen to Ben Bernanke and engage in risk taking. As a sponsor, this is kind of good news for me. Why isn't it VERY good news for me? Well, fundamentally speaking, nothing quantitative has changed.
1. Rates have been low for 2+ years now. So what's changed? I think companies have decided that the political dysfunction is the new normal. Congress will say no to everything Obama proposes, which doesn't matter because Obama will be in office for the next four years.
2. Equity risk premiums (spell check doesn't recognize "premia") have been low. Which is counter-intuitive because you would assume that a lack of equity interest would drive up the cost of equity, but that hasn't been the case. In my opinion, I think the increase in investor sentiment has hurt Apple's stock price. Why? Risk aversion let most institutional investors out of the equity markets, however they kept one foot in equities (fake high beta) via Apple. Once they became more aggressive in the general equity market, they dumped a chunk of their Apple holdings.
3. Fair market value. Assets have been slightly overpriced due to low interest rates, but does it really matter? Assuming 0% growth and fairly constant FCF, you would assume that a back of the envelope equity payback of ~3 years would encourage sponsors. But this isn't the case. Why is that? In my opinion, "smart money" knows that assets are overpriced, and the only exit strategy they have is via a strategic acquirer or an IPO.
I've had a number of deals clogging up the pipeline because of equity investors waiting for other investors to pull the trigger first. Interesting times we live in. I think this is the last year for solid LBO's in the middle market space, as rates continue to quietly increase. Or decrease. Or remain flat. Meh.
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