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Depressed funding environment puts spotlight on preferred equity to fuel M&A

June 5, 2023

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Depressed funding environment puts spotlight on preferred equity to fuel M&A

By Calvin Trice


Bain Capital Special Situations sees consolidators turning to preferred equity to fund acquisitions as economic uncertainty and high interest rates dry up traditional sources of funding, said partner Cristian Jitianu.


Consolidators typically fund M&A with equity or debt, Jitianu said. Private capital has become more hesitant with recession fears in the air. Debt financing has become more expensive in the last year due to rising interest rates, and lenders who do provide financing are doing so at reduced leverage levels, Jitianu said.


“To continue a rapid consolidation pace, [consolidators] are having to raise preferred equity — either convertible or non-convertible,” he said.


Bain Capital Special Situations, which has USD 18bn in assets under management (AUM), provides structured equity and credit to founders and entrepreneurs, corporates and asset owners, he said.


Bain Capital Special Situations is focused on investments in companies with capital-intensive growth needs such as industrials, technology and services, particularly software businesses that are not yet cashflow positive and need growth capital to continue accretive acquisitions, Jitianu said.


Healthcare, consumer, business services and the financial services subsectors of wealth management and insurance brokerage are also attractive areas, he said.


Bain Capital Special Situations prefers businesses in growing markets with stable demand, often in the form of recurring or reoccurring revenues, the executive said.


Special Situations also has a bias towards businesses with differentiated offerings and with scale, which are not always the largest players, Jitianu said. Bain is also leaning towards businesses that are more resilient to recession.


Across all sectors, Special Situations often backs consolidators in sectors facing a generational transition of owners or that need investment because of the growing importance of technology and scale, he said.


“Marketing and customer acquisition have shifted towards digital channels that advantage more sophisticated scale players,” Jitianu said.


Driving wealth management, insurance brokerage consolidation


Tech-enabled financial services has been an important investment vertical for Bain Capital Special Situations, and wealth management had become a key sector of interest, he said. Many businesses in the space have double-digit organic growth and high client retention, Jitianu said.


Bain Capital Special Situations was part of the CAD 1.34bn investment for a 20% stake in CI Financial Corp.’s [TSX:CIX] U.S. wealth management business at a valuation of CAD 7.1bn. The valuation of 25.6x annualized adjusted EBITDA falls in the high range of multiples for the best and largest registered investment advisor (RIA) businesses, which continue to fetch multiples in the low to mid 20s, he said.


Bain took an interest in the business when CI Financial announced in April 2022 that it planned to sell up to a 20% of the division in an IPO to pay down debt, Jitianu said.


Equity markets began to falter thereafter with no recovery in sight that would make conditions favorable to taking the business public, he said.

“We started a dialogue with management about providing capital in other forms,” Jitianu said. CI Financial then held a limited auction process, he said.


Special Situations also invested in Nebraska-based wealth manager Carson Group in July 2021, and that company plans to make 10 acquisitions or investments in 2023, this news service reported.


Insurance brokerages continue to be favorable investments for similar reasons, he said. Consolidation platforms in that space tend to be valued with EBITDA multiples in the mid-teens, Jitianu said.


Special Situations invested in Pennsylvania-based brokerage Keystone Agency Partners (KAP) as part of that company’s launch in 2020. KAP hopes to add about USD 100m in revenue per year through acquisitions, this news service reported.