Year End Wrap Up

It’s been a busy year here at CriticalPoint. As we reflect on 2023, we wanted to highlight all the great things that transpired this year. Our firm has grown immensely since our inception eleven years ago. In March, we refreshed our brand and website to showcase our evolution as a firm and our expanded service offerings. Furthermore, in May, we moved into a brand-new office that we are extremely proud of and hope you will find time to visit us.

As we’ve grown, the diversification of our service offerings has been paramount to our success.? This year we hired key personnel to continue our growth trajectory.? Mike Vehaskari joined CriticalPoint in June as a Managing Director in our Execute division with a focus on M&A advisory.? In September, Mike Courtney joined us as a Managing Director in our Invest division to lead portfolio operations.? In October, K.C. Brechnitz joined CriticalPoint to lead our newly established private credit platform within our Invest division.? Also in October, Curt Himebauch joined us as a Managing Director in our Execute division with a focus on business development.?

Year to date, we’ve closed over 20 deals across our three platforms and over 120 since we started CriticalPoint eleven years ago.?

This achievement is a testament to our hard work and enduring commitment to our clients who have trusted us throughout the years.? As we look to build on that success, it’s important to take inventory of the various trends we’ve seen this year across our Source, Execute and Invest divisions and think about where we are headed.?

Source- Dislocated, but Not Broken

Our sourcing business continued to grow in 2023 notwithstanding the broader slowdown in M&A activity.? Despite a shortage of higher-quality banked deals in market, sponsors maintained a steady ratio of platform to add-on investments, with the latter driving more successful outcomes.

The biggest trend has been an industry shift towards operator-led strategies, as differentiation is generally more difficult in proprietary outreach than in controlled processes.? Another notable trend is the continued rise of the “anti-fund” – independent sponsors, family offices, and other alternative capital pools seeking to differentiate by moving towards non-traditional structures that provide unique options to sellers.

For add-ons, prices remained resilient as undersupply (coupled with robust demand) and a lesser need for leverage in these types of deals supported values across most industries.? The major exception was on the consumer side as consumer discretionary / product demand remains at a decade-low while demand for consumer services businesses is as strong as ever.

Given the rapidly rising interest rate environment over the last couple of years and accompanying economic unease, many sponsors find themselves significantly behind their capital deployment schedules, making current and future fundraising extremely difficult.? Exacerbating the issue has been a declining amount of private equity exits, leaving illiquid LP’s hesitant to allocate beyond their current commitments and limiting the ability of some sponsors to increase their fund sizes and close out their active fundraises.

On the bright side, several sponsors are indicating a material pickup in exits in their near-term plans, which should create some significant momentum into 2024 and materially increase the velocity of both capital deployment and raising.?

Universally, deal activity and momentum picked up meaningfully in the second half of 2023 and all signs portend well for that trend continuing into the new year.

Execute- The Have and Have Nots

2023 proved to be a challenging M&A environment in the middle market for a multitude of reasons. ?Rising interest rates, an uncertain macroeconomic and geopolitical environment, decoding the Covid bump, and the tail end of supply chain and inventory management challenges led to a significant slowdown in deal activity for the first two thirds of the year with some recovery in activity coming post-Labor Day. ?Many investors spent 2023 digesting platform acquisitions from 2021 and 2022 and completing add-on acquisitions for those assets.

In spite of macro challenges weighing down overall M&A activity, multiples for quality assets and assets in favored sectors remained elevated. Sectors such as IT Services, Healthcare, and Communications continued to produce robust valuations and competitive sale processes. ?

Conversely, the market for declining businesses or assets in out of favor sectors such as retail, logistics, and many consumer discretionary areas was almost nonexistent. Investors who acquired businesses over the last few years in now challenged sectors have been facing the prospects of valuation write downs and credit defaults which has further impaired investor appetite in those sectors.

Interest rates and availability of credit will continue to be one of the most significant headwinds to deal activity and achieving premium valuations in 2024. Traditional lenders, such as banks, have tightened their underwriting standards for M&A transactions which has led to increased utilization of private lenders, albeit at higher rates, and sellers being forced to accept more buyer-friendly deal structures (e.g. earn-outs and seller financing). ?Despite current market challenges, significant dry powder at both equity and credit funds has added some pressure on investment managers to deploy capital. ?That dynamic will likely drive some level of deal activity and premium multiples for high quality assets regardless of macro conditions.

Invest- Increased Activity and Diligence

2023 represented a dynamic year entailing volatility, uncertainty, and ultimately increased activity in the corporate divestiture space.? As corporates and business owners scrutinized their operations in the face of climbing borrowing costs and an uncertain geopolitical and macro-economic landscape, many initiated divestiture processes in the second half of the year for non-core business units to help adequately capitalize balance sheets and gain efficiencies ahead of any potential downturns. ?Seller expectations have slowly started to normalize, as they face the reality of significantly higher debt costs and new business / consumer sentiments. ?However, many have clung to lofty valuation expectations which continues to weigh on deal volumes. ?Given the aforementioned, a keen focus on commercial diligence, operational excellence and cost structure optimization for the future business environment remains critically important as the margin of error narrows for adequate investment returns.

We believe the pressure from increased debt loads taken on over the last few years in the era of cheap credit, will drive elevated corporate divestiture activity, well into 2024 and beyond with some being in the distressed bucket.?

In October, K.C. Brechnitz joined CriticalPoint to lead the launch of our newly created private credit platform.? Our core mandate will be to combine flexible capital and an operationally-oriented approach to manage complexity and support clients’ business and financing needs in the $1 to $10M range.? Our breadth of experience and diverse set of resources and capabilities allows us to help lower middle market borrowers accomplish their financing and business goals in a differentiated way. ?Full details can be found on our website.

?Looking Forward

As we reflect on the events of 2023, we are reminded how important serving our clients has been in this challenging environment.? We feel there is a lot to be excited about in 2024.?

Next year, and since our inception, our mission is to continue serving the needs of owners, entrepreneurs, management teams, private equity firms and stakeholders with our experience, knowledge, independent advice and expert judgement to help companies realize their greatest potential.

We look forward to connecting with you in the new year and from all of us at CriticalPoint, we wish you and yours a very happy and healthy holiday season!?

Contributing Authors:

Trent Spangler | Director, Capital Markets

Direct: (424) 217-1816

Email: [email protected]

Ryan McDowell | Managing Director, Head of Business Development

Direct: (310) 574-2170

Email: [email protected]

Nick Cipiti | Director, Investment Banking

Direct: (310) 321-4172

Email: [email protected]

Luke Ewing | Managing Director

Direct: (310) 697-8767

Email: [email protected]

About CriticalPoint Headquartered in Los Angeles, CriticalPoint executes, sources, and invests in deals for the traditionally underserved middle market. CriticalPoint uniquely combines the best of both investment banking and private capital service offerings. Since our founding in 2012, our mission has been to serve the needs of owners, entrepreneurs, management teams, and stakeholders with our experience, knowledge, and expert judgment, to help them realize their companies’ greatest potential. To learn more about CriticalPoint, please visit www.criticalpointpartners.com .

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Disclosures

Securities Products and Investment Banking Services are offered through CriticalPoint Partners, LLC. Member FINRA SIPC

Messrs. Spangler, McDowell, Cipiti and Ewing are Registered Representatives of CriticalPoint Partners, LLC. Member FINRA SIPC