At the 2017 Association for Corporate Growth (ACG) Chicago Capital Connection, VRC’s Chicago office managing director John Bintz sat down with John O’Connor, partner with Plante Moran’s Chicago office, to discuss valuations in the mergers & acquisitions market, the equity and debt markets, domestic interest rate activity as well as interest rate activity internationally and within underdeveloped countries.
John O’Connor: All right, thanks again. Maybe I could ask you your name, the firm you work for and what your firm does.
John Bintz: My name is John Bintz and I am the managing partner of the Chicago office of Valuation Research Corporation, and we are a full-service valuation firm.
John O’Connor: Well, excellent. As a full-service valuation firm, what are you seeing in valuations in the M&A market right now?
John Bintz: That is a great question, John. If you take one-step back, historically go back to about 2008, 2009, 2010 time frame, we were in the Great Recession and multiples were depressed. So, you probably have an average multiple in the middle markets of maybe five, maybe six. Today, they are approaching 10, and some are at 10. Different industries, different segments, technology, biotech, biosciences, those industries are hot and those multiples are sometimes in the teens. There is a scarcity of deal flow for private equity investors, corporate investors, strategic investors and they are willing to pay up for good assets if it fits the right niche.
It’s definitely a seller’s market today, so if you were a seller of a middle-market company with good revenues, good EBITDA, a sound management team, and you’re looking either for an exit, a liquidity event, or a growth investment, now is a great time to do that because there’s a lot of capital out there. Private equity investors, as well as corporate investors, have to put their money to work. They don’t want to give it back, and shareholders of corporate companies don’t want it to just sit in cash, earning 0.2%. They need to put it to work, whether it’s buying back stock, making more investments or doing M&A activities. So, the corporates, the strategic buyers, as well as the private equity financial buyers are in the markets, paying up for certain strategic assets.
John O’Connor: Excellent. Well, that’s helpful in terms of understanding the equity markets. Maybe you could talk for a minute about what you’re seeing in the debt market, specifically interest rates in the U.S. and interest rates in underdeveloped countries.
John Bintz: So, one of the reasons why the M&A market, middle-market M&A market, is so active and robust is because we have low interest rates. And interest rates, the 10-year treasury is roughly at 2.3, and we’re a developed country so we’re in the United States. If you look at some other developed countries, they’re relatively low as well, and I think part of that is the growth story which, mature markets – we’re talking about North America, we’re talking about Europe, we’re talking about Japan – and those interest rates are relatively low.
Now, interest rates can stay low for a long, long time. They have, historically. They could stay this low for 20 or 30 years. And, the age that we are in, I remember the late ’70s and early ’80s when interest rates were 15,16, 17 percent. You know, I heard stories from people who were getting mortgages on their homes for 19 percent, and then they refinance at 17 percent and they were really, really happy. So, interest rates can stay this low for a long time.
One of the things I think that has interest rates in these developed countries really low is demographics. You have a lot of older people in some of these developed countries – Japan, North America and Europe – and you have lower fertility rates. A fertility rate is basically how many children are born for a couple, and you basically need 2.0 kids to maintain your economic pace. If you have something lower than 2.0, then you will contract as a society. In Japan, for instance, I believe there are 1.5 or 1.6 children per couple. They’ve had low interest rates and negative interest rates for decades, for a long time. You look at Europe, I think their fertility rate is about 1.6, 1.7, and they’re contracting. You have negative interest rates in some of those countries, in Germany, I believe maybe in Austria, maybe some Scandinavian country. They have negative interest rates. What? How can that happen? It’s crazy.
Then, you have the United States, and the United States’ fertility rate is about 1.8, 1.9, prior to immigration. If you have immigration coming in, that gets you just slightly above 2, and so that has helped the United States. Not a commentary on illegal or legal immigration, but just immigration in general, it has helped the U.S., because there are more people, more people buying things, consumers.
John O’Connor: So, a lot of times you hear forecasters talk about the normalization of interest rates. So, is there a direct link between how high rates might go and birth rate?
John Bintz: There could be a correlation but I’m not that smart to figure that out. I do know the normalization of interest rates probably should happen soon. If you look at the Federal Reserve’s balance sheet, they went from maybe $1.2 trillion to, like, $5 trillion today. And that five-times expansion, under normal situations where you might think it’s, “Oh my god, inflation’s right around the corner,” John, it never happened. It shows you how low we were, in contraction of our Great Recession, and it showed you, kind of, the general expansion of our economy. Today, the wealth of all Americans is approaching $100 trillion. In the Great Recession, it got down to about $65 trillion, so we’ve gone up a lot since then, and it contracted in ’07 from about $80 trillion. So, it went down, now it’s gone up past where we were in ’07, and the Feds’ balance sheet has gone from $1 trillion to $5 trillion, and no inflation.
So, is there a correlation? Yes. I don’t know what it is, but we have a larger economy, a larger, more expansive world, more economic growth, and the triggers that were for inflation 30 years ago might not be triggers for inflation today. And you’ve got a global economy, you’ve got competition for capital, for money, you’ve got an aging demographic, you’ve got technology. In my opinion, technology really brings down inflation. You have a smartphone here, John, where, 30 years ago, this represented maybe $10,000-15,000 worth of stuff – a TV, a telephone, an alarm clock – it’s all in here now for $1,000. So, you’ve compressed inflation, I think, with various technological and medical advances, so I think that has a big effect on the lowering of inflation as well as global markets. It’s competitive, you have China that’s opened up, that’s competition. So, you know, maybe 40-50 years ago, the United States and Europe were kind of the only games in town. There are more games now.
John O’Connor: That’s really interesting. Thanks, John, for really good insight. Anything else you want to offer up in terms of, kind of, the current state of M&A and private equity?
John Bintz: You know, other than the fact it’s pretty robust at this point, and I don’t see any balloons popping in the near future but, certainly, anything can happen. But I think things are pretty robust, and they feel pretty good.
John O’Connor: Yeah, same here. Thanks, John, thanks so much.