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Private equity looks inward amid global banking crisis

Illustration of a health plus peeling back revealing a hundred dollar bill on the reverse side.

Illustration: Aïda Amer/Axios

Private equity investors are tending to portfolios and focusing on diversifying their banking in the wake of the global banking crisis.

Why it matters: Silicon Valley Bank's collapse and its subsequent domino effect is the latest bucket of cold water thrown on sponsor-led dealmaking in health care.

Driving the news: The Federal Reserve raised its target interest rate by a quarter-percentage point yesterday.

What they're saying: Asked about the main near-term concern for his firm, one health care private equity partner replied: "Getting money out to more stable banks."

  • He cites Bank of America, Citi and JP Morgan as examples.
  • "The last week and a half in particular has shown us that we really need to make sure that our businesses have sound treasury, that they've got strong balance sheets, access to multiple funding sources and banks," says Mubadala's head of life sciences Camilla Languille.
  • "The SVB meltdown is less direct outside of the technology sector. It’s the rising rates that have certainly delayed or aborted sale processes, particularly among sponsor sellers," says Greg Moerschel, managing director at BPOC.

Yes, but: "Despite the market turbulence right now, we are continuing to look for opportunities," Languille says.

  • The same is true for Lincoln Road Global Management managing partner Jeff Magny, who says none of the firm's active opportunities have yet to be placed on hold.
  • "Deals are still getting done as evidenced by recent announcements post-collapse," he says.

But, but, but: Proper auction launches are still few and far between, and the processes that are ongoing are tightly run ships.

  • "The auction processes that we're participating in now tend to be very limited auction processes, where they've reached out to two or three buyers," Languille says.
  • Typically that small pool comprises bidders who "really want" the asset — that is, buyers who can diligence properly and are motivated to figure out financing.
  • "A good half to third of the deals that we're pursuing are bilateral discussions, and that's very different to what we saw in 2020, 2021 and the first half of '22," Languille adds.
  • Normally the market sees a "seasonal lull" in January, but it has extended through the first quarter of 2023 given the myriad macro pressures, Moerschel says.
  • "Our sense is that sponsors are focused inward rather than taking companies to market in this environment, unless they have to," Moerschel adds. "Strategic buyers have been more active because they often have financing and are also looking for growth as the economy slows."

Zoom in: The lower middle market remains fertile ground for deals that don't require leverage, sources tell Axios.

  • "You are not finding as much of a gap in expectations between buyers and sellers" in the lower middle market, Magny says.
  • "At the higher end of the market, sellers with an attractive asset are more inclined to ride out the storm versus selling at what they view as a discount," he says. "Rising interest rates and lender conservatism have a lot to do with that."
  • Attractive buy-and-build opportunities still exist, he says.
  • "In those cases, there is a modest dislocation between buyer valuations and seller expectations that we expect to last for another quarter or two," Moerschel says.

The bottom line: Difficult financing markets remain the primary millstone for larger-scale dealmaking, and sponsors are focused on getting their houses in order.

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