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Embedded Finance: Driving the Future

In our modern world businesses are becoming more consumer oriented and user friendly – consumers have a variety of options to get the best experience and product/services with minimum effort online and offline. If you get your Uber in the morning and use your Apple Pay to buy a cappuccino on your way to the office you’re already taking advantage of ‘Embedded Finance’. If you’re looking to buy a nice bag for your mom, Affirm or Klarna can finance your purchase via their buy-now-pay-later model. So, what is Embedded Finance and why this has become yet another buzz word?

Embedded Finance comes from the general concept of Banking as a Service, or BaaS. BaaS allows non-financial companies to offer access to standard banking products and features at point of sale. This is enabled through webhooks and open APIs (Application Programming Interfaces) – Embedded Finance is more defined by the front-end access to financial services, whereas BaaS is more defined by its back-end banking functionality. This integration via open banking systems and API architecture allows e-commerce platforms, websites, apps and other non-bank businesses to deliver financial services, often white-labeled, to their customers. Now, without the burden of regulatory and compliance oversight of being a traditional bank, embedded finance enables you to offer to your customer additional features to accelerate your sales and engagement, simplify user transaction experience and generate new revenue streams.

According to recent studies, the Embedded Finance market globally is expected to reach $7 trillion in the next 10 years. This is a huge opportunity for banks, fintech companies and other non-bank lenders. VC investors have been fast to recognize the potential value in the niche – the chart below depicts global VC investments in Embedded Finance companies from 2016 through September 2021, and we’re just in the beginning of the cycle.

Source: Statista 2022

 

This is a global phenomenon – young population and technology advancements drive embedded finance in China, India, Indonesia, several Latin American countries and, of course, the US, Europe and the UK, the latter being one of the earliest adopters of BaaS models. This trend created a lot of opportunities for virtual banks, also known as neobanks, fintech companies, BaaS and, of course, embedded finance. These models are taking a growing share of overall transaction volume compared to traditional banks. Quoting J.P. Morgan CEO Jamie Dimon, “The role of banks in the global financial system is diminishing”, and millions of newly added accounts by neobanks prove it. Embedded finance future lies in several major applications:

Embedded Payments

Payment processing involves an automatic pay feature with your saved credit card or digital wallet. PayPal and Stripe have been at the forefront of embedded payments for several years now, while other players are coming to the market to address other areas such as international transaction complexities, user onboarding processes, KYC compliance, virtual credit cards and others. These solutions make the process more secure and streamlined, help protect from fraud, card management and fulfillment, reduce transactional fees and provides liquidity faster for various jurisdictions.

Embedded Insurance

Renting a car, booking a trip, obtaining Airbnb host protection and other goods and/or services purchases come bundled with an insurance protection coverage in the same offering. An embedded insurance solution is usually integrated into an existing system through an API, which helps insurers analyze policy and price data and suggest the right policy at the point of sale.

Embedded Lending

Embedded lending is split into two significant components: Retail lending and Business lending. Affirm and Klarna are great examples of B2C lending, where capital provider would face consumer credit risk based on FICO score or other proprietary alternative scoring system. Business lenders are B2B capital providers and include such companies like Kabbage, Fundbox and others targeting SME’s (small to mid-sized enterprises). Sometimes these providers are standalone offerings integrated into customer’s ERP systems, and sometimes they target specialized software products to give a supplier or vendor an option to get paid early on the product sold or job completed. The structures could vary from lending to revenue-based model, advances against receivables, purchase orders and inventory. These working capital solutions help consumers purchase discretionary products and help small business sustain their working capital requirements and overhead as well as create stronger trade networks with customers and suppliers.

Embedded Investing

Another extension of Embedded Finance is Embedded Investing, or providing robo-advisory, brokerage and wealth management services to consumers. Acorns, for example, delivers micro investing, full automation and adjustments according to your goals and wishes via automatically investing your spare change. PayPal now offers crypto purchases through their platform, which also changes the way brokerage services are offered and consumed.

Our everyday life includes a wide variety of transactions, and they are increasingly being digitized. Embedded Finance will continue to grow as tools to offer a digital product and deliver a more convenient and flexible customer experience. It can help streamline the payment process, allow customers to earn points and rebates, improve savings, protect data security, and make businesses more efficient and resilient. Embedded Finance will bring additional structural changes to the finance world and revolutionize capital flows over time – this creates great opportunities for VC and Private Equity on the technology side and debt providers on the B2C and B2B side. The first players who embrace the changes are the most likely to win.

Tell us what you think on LinkedIn, Instagram, Facebook, or Twitter! @opusconnect.

By Alisa Rusanoff, Portfolio Manager, Senior Vice President at Crescendo Asset Management
September 2022

Private Equity Firms Brace for Slow Quarter Ahead as Consumer Spending Shifts to Frugality

We talked to a dozen experts to find out what less consumer spending in the wake of the Covid-19 pandemic means for private equity.

In recent months, as the Covid-19 pandemic has slowly receded in the United States, experts in the private equity world have been closely watching consumer spending habits. What they’ve seen is a shift towards frugality that is likely to have a profound impact on the industry in the months and years to come.

“Instead of eating that steak, they’re going to the QSR,” said Brent White, Vice President at Gauge Capital, a Dallas-based private equity firm focused on investing in growth-oriented middle market companies. “What they’re trying to do is downsize what they buy and be more frugal on how they spend their money.”

White says the ripple effects of this new frugality are already being felt in the private equity world, where the deal flow has slowed, and valuations have come back down to earth. “We’re not going to see the elevated multiples. We’re going to see normalized multiples and valuation expectations for these businesses,” he said.

White is not the only one seeing this shift. Across the private equity landscape, experts are predicting a “less liquid” quarter ahead, as businesses that were once seen as sure bets become less attractive to investors.

“I do believe that there will be a slowdown,” said Bobby Sheth, Managing Director at Salt Creek Capital, a private equity firm based in Woodside, California, adding that he does not expect to see a recession like the one that followed the financial crisis of 2008.

“As we think about mass-market chains and products that are much more commoditized in nature, we think that there’s going to be a bit of a slowdown over the next three to six months for sure,” he added.

But Sheth added that specialized higher-end businesses such as certain wine racking service providers and wood flooring companies that he has invested in over the past year are likely to weather the storm better than their mass-market counterparts. As these businesses offer more experiential products and services that consumers are willing to pay a premium for and can be seen as a real asset that counters inflation.

The Russia-Ukraine conflict and its broader geopolitical implications on oil prices are among the other factors that could have an impact on consumer spending and, as a result, private equity in the months ahead.

“That’s probably what keeps me up the most,” said Sheth, “if that escalates, if that keeps on getting worse, what does that mean? I think broadly, and I saw this, again, kind of in 2008 and 2009, you know, if oil stays at elevated levels for a significant period, that causes all sorts of ripple effects across the economy.”

The new shift toward frugality is at odds with the first quarter of 2020, when consumer spending was 24% higher than pre-pandemic levels, according to a Bank of America study. But as inflation and gas prices rose and the government stimulus checks dried up,

consumers appear to have tightened their belts.

“People took a pause and started being cautious about where they spend their money,” said White. “And you’re seeing that flow through the balance sheet on a lot of these companies that we review that are coming to market.”

David Thibodeau, Managing Director, Wellvest Capital, a Boston-based firm investing and advising companies that are in the consumer health and wellness space, argues that further price increases could lead to an even more pronounced shift in consumer behavior.

“Many of our portfolio companies/clients have been taking price increases over the last year and multiple price increases,” he said.

“Not just one or two, but multiple. That’s going to reach a limit. The consumer is going to, at some point, start to say ‘no, we’re just not willing to [accept that]. I think we’re already we already seen that in some of the IRI numbers where people are moving towards replacement brand replacement products to brands,” he added.

Ketan Mehta, Managing Partner at The Corporate Development Group, a California-based investment bank that specializes in consumer products, remains optimistic, however, arguing that in the long term, the pandemic will lead to a pent-up demand for consumer goods and services.

“But I think we’re gonna have a soft landing,” Mehta said, predicting the supply chain issues that have plagued businesses in the past couple of years will eventually ease next year “We may dip into recession, a very short amount of time, maybe towards the end of this year or first quarter of next year. But I think 2023 is going to be an OK year.”

Similarly, Nick Barker, Partner at Longhouse Partners, a Detroit-based consumer-focused private equity firm, is bullish when it comes to the merger and acquisition market (M&A) for consumer businesses.

“Because of consumer demand, a lot of businesses are now, of course, trying to sell off of those arguably inflated earnings, and people are buying off of those inflated earnings,” he said.

“But I think we’ve seen several data points where that level of aggressiveness in the M&A market is persisting. I think everyone’s obviously kind of thinking about recession and what that may mean. So, there may be a little bit lower leverage applied to some of these deals and more and more equity, but we haven’t yet seen that have a massive impact on overall valuations,” he added.

 

Tell us what you think on LinkedIn, Instagram, Facebook, or Twitter! @opusconnect.

By Lou Sokolovskiy, Founder & CEO at Opus Connect
August 2022

Supply Chain Crisis

Supply Chain Crisis

Are we experiencing the biggest shift in supply chains since the era of globalization began?
From the US-China trade wars to the Covid-19 pandemic, there has been an existing strain on the supply chain. Now as Russia’s war on Ukraine escalates, the strain on global supply chains has intensified. Understanding how global manufacturers responded to the disturbance of their supply chain is a crucial part in helping businesses structure their responses. 

Russia’s war against Ukraine has heavily impacted supply chains around the world. According to Jennifer Bisceglie, Founder, and CEO of Interos, a supply chain risk management company nearly “300,000 companies in the U.S. and Europe have suppliers in Russia and Ukraine, putting their national economies at risk. That’s how interconnected our world is today” (Segal). In fact, some say that the manufacturing sector will be impacted the most by this supply chain disruption. Simon Gealt, the Executive Vice President and Chief Officer at supply chain consulting firm Proxima says, “It’s things like the neons and metals that are going to have an enormous effect on the production of semiconductors and automobiles” (Segal). Companies will now focus on monitoring their supply chains in order to get ahead of the next crisis. This changing landscape will lead to new strategies for alternative sourcing. Therefore, some do argue that we are now experiencing the biggest shift in supply chains since the era of globalization began. 

How will manufacturing companies respond?

Many manufacturing companies are now moving quickly to create visibility and clearance in their supply chains. Given the rapid changes in customer demand, businesses must now analyze and prepare their supply sources in advance of potential disruptions. “It’s not just a concern for big companies, but it is a concern for everyone. Now even small mid-size companies all have exposure either directly or through their suppliers,” says Lou Sokolovskiy, CEO and Founder of Opus Connect. Understanding the full supply chain and customer base, not one degree away but at least five degrees away is very important. For example, various portfolio companies may look into sourcing their parts from vendors in regions with slower demand. This will allow for a greater supply in active factories. In a 2020 survey by Mckinsey  “just over three-quarters of respondents said that they planned to improve resilience through physical changes to their supply-chain footprints. By this year, an overwhelming majority (92 percent) said that they had done so” (Trautwein). 

It is going to be critical for companies to work on alternative sourcing strategies, especially as tensions increase between Russia and Ukraine. Overall, manufacturers must think of new innovative ways to optimize production, distribution, and logistics in order to avoid supply chain issues. 

Tell us what you think on LinkedIn, Instagram, Facebook, or Twitter! @opusconnect.

Sources:

  1. Alicke, Knut, et al. “How Covid-19 Is Reshaping Supply Chains.” McKinsey & Company, McKinsey & Company, 23 Feb. 2022, https://www.mckinsey.com/business-functions/operations/our-insights/how-covid-19-is-reshaping-supply-chains. 
  2. Miguel, Alejandro Beltran de, et al. “Private Equity and the New Reality of Coronavirus.” McKinsey & Company, McKinsey & Company, 16 Sept. 2020, https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/private-equity-and-the-new-reality-of-coronavirus. 
  3. Segal, Edward. “Supply Chain Crisis Worsens as Russia’s War against Ukraine Continues.” Forbes, Forbes Magazine, 2 Apr. 2022, https://www.forbes.com/sites/edwardsegal/2022/04/02/supply-chain-crisis-worsens-as-russias-war-against-ukraine-continues/?sh=27983c4e6e49. 

By Lou Sokolovskiy, Founder & CEO at Opus Connect
April 2022

How the Pandemic Transformed HR Function for Private Equity Firms

 

In 2020, when the Covid-19 virus turned into a pandemic, the business world had to adapt quickly. Companies of all sizes were forced to let their employees work from home as a temporary solution. As the pandemic dragged on, it became clear that remote work was not just a provisional fix but a new way of working.

For private equity firms and their portfolio companies, which had long relied on in-office workforces and face-to-face interactions to conduct due diligence and evaluate company performance, the switch to remote work meant a transformation in how they did HR, according to several private equity HR executives interviewed for this article.

In many ways, the pandemic elevated HR from a back-office function into a strategic role in private equity firms.

“We are thinking about HR or Human Capital in a new way at Southfield” Tim Lewis, Partner at Southfield Capital told me.  “10 years ago it was a back office function required for compliance and benefits.  Now a thoughtful and engaged HR function is a strategic necessity and the range of activities our HR execs are asked to address has expanded from functioning during a pandemic to addressing new ways to think about the workplace.”

“It’s a whole new game today,” Keith Swenson, longtime HR executive and operating partner at New York-based consulting firm Beckway, told me in a Zoom call.

“For most organizations, they have to press the reset button because the conditions in the market have changed. The expectations of workers have changed. Based upon being remote versus in office, the expectations of new people coming into the organization have changed as a result of that,” he added.

Time for a New HR Playbook?

With the business world moving to a distributed workforce, HR needs new tools and processes. It appears that the old ones just won’t cut it anymore. Swenson, for example, whose company leverages leading B2B commercial products, said HR executives like him had to rethink the way they attract, evaluate, and retain talent.

“Companies are finding themselves having to rethink their whole strategy around people on how they supervise, how they motivate, how they pay,” he said, adding that he has observed some organizations lose key personnel as a result of the pandemic.

Retaining talent has been a significant challenge for companies across industries. According to the U.S. Bureau of Labor Statistics, 4.5 million workers, or 3% of the country’s workforce, quit their jobs in November, intensifying the mass resignations that began in early 2021.

Experts say one of the reasons for the mass exodus is the ability of employees to work remotely. Except for certain jobs that cannot be done from home, such as those in the medical and construction industries, most positions appear to be doable with a computer and internet connection. At least, that is what workers think, and employers have been forced to accept.

“There is a war on talent,” said Lisa Rivoli, the executive vice president of Human Resources for New York-based Milrose Consultants a Southfield Capital portfolio company.  “We have to look to retain the talent we have. We are exploring ways of improving our benefit offering and maybe offering a continuous, flexible workweek,” she added.

For HR professionals like Rivoli, the pandemic has meant a shift in the way they do their jobs. No longer can they rely on face-to-face meetings with employees to get a sense of their work performance. They now have to find other ways, such as video conferencing and employee surveys, to gauge how people are performing.

“It’s gotten a lot harder because you can’t just get up and go down the hallway anymore,” she said. “You have to make all these phone calls. And sometimes, you know, people are on the phone, you can’t reach them… I literally have two phones. Two phones are going off. My computers are going off. My house phone might ring. So it’s a lot.”

Attracting New Talent: A Challenge to be Courted

In addition to retaining your best and brightest, attracting talent has also become a challenge for HR professionals. To lure the best talent, Forbes reports, many firms are now offering sign-on bonuses and other perks, such as paid vacation days and tuition reimbursement.

The appeal of remote work is one that PE portfolio companies might have to grapple with for the foreseeable future, including those companies that cannot embrace it because of the nature of their business. American Refrigeration Company (ARC) a Southfield Capital portfolio company based in New England is one such company.

“Finding people during COVID has been the biggest challenge,” said Mary Fairbairn, the company’s Director of Human Resources.

For example, she said as an essential business it remains a struggle to find project managers to oversee product installations for manufacturing plants or ice-skating rinks as those jobs require people to be on site. There is no way an installation can be done remotely – we need people onsite. This problem could become more acute as the pandemic drags on and new Covid-19 variants continue to emerge.

To Fairbairn, remote work has also meant “a mindset shift” for her department as it tries to retain and recruit talent.

“I think it’s shifted our mindset, from something that has to be well defined, to something that’s a little bit ambiguous,” she said, explaining how employees’ personal lives are now a greater factor when it comes to things like scheduling.

“Also, a lot of people have children. We try to be a little bit more flexible when it comes to someone that has child care, or if their child is sick, of course, we’re always very nice about it.”

“A Candidate’s Market”

And nowadays, when people apply for a job, their goal might not be to get hired by the company, but rather to use the offer as a bargaining chip for a better position or more money at their current company, said Rivoli.

“They may want to use your offer to bring it back to their current employer to see if they can gain a better compensation package where they are. So, we’ve had that with people ghost us and then at the ninth hour, tried to negotiate real hard on compensation after they already knew what the compensation package was,” she said.

In light of this reality, Recruitor.com has made six wide-ranging recruiting projections for 2022, including the notion that “remote work is the new normal.”

“It’s a candidate’s market,” said Recruiter.com CEO Evan Sohn. “The talented candidates are in high demand. And if they’re demanding hybrid or remote workforces, the companies have to adjust to those workforces.”

Adam Miller, the founder, and managing partner of Hygge Capital Partners, a human capital solution for the private equity industry and their portfolio companies, says the need for human capital within the PE space has never been greater.

“Now, all firms are rushing to the plate to hire HR professionals to help them,” he said. “They think proactively through each one of these components to make sure that they’re creating a competitive advantage in the market when they’re out telling their story marketing their brand.”

Miller’s views about HR’s function being about “creating value” align with those leading HR scholars such as Dave Ulrich. Often referred to as the “father of modern HR” for his pioneering work on human capital, Ulrich recently said that the time had come to “reinvent” HR.

“HR is not about HR,” he told Geeks, Geezers & Googlization podcast on December 30. “HR is about helping your organization compete and succeed in the marketplace.”

By Lou Sokolovskiy, Founder & CEO at Opus Connect
January 2022

ESG Investing: Here’s What’s Next

ESG Investing: Here’s What’s Next

ESG investing is not a new phenomenon. Sometimes referred to as “sustainable investing,” ESG stands for “Environmental, Social, and Governance” and was first coined in 2005. It is used as a tool for investment decisions but is a more recent concept of interest among private equity firms.

Traditionally, PE firms have strictly been concerned about ROI and compliance with legal standards. A new focus on impact investing has been gaining traction where the end goal is to maximize both financial returns and social impact.

If a PE firm wants to differentiate itself from others, it might proactively set metrics to demonstrate its commitment to ESG. Firms have been subject to increased scrutiny by ESG-conscious investors and decision-makers in the environment that COVID-19 has created. Providing concrete evidence of ESG-focused due diligence and performance reporting could give a firm a distinct advantage over its peers. Tal Sheynfeld of Energy Impact Partners said that “We see a significant amount of correlation between high ESG scores and the success of our investments. We have resources available to the companies that we invest in, which makes it easier for them to make improvements across the ‘E’, ‘S’, and ‘G’.”

At the same time, evaluating portfolio companies based on their perceived commitment to ESG can be fraught with difficulties. One of the main problems is that there are many misconceptions around the topic because it is based on opinion and subjectivity. John Sheffield of Valley Ridge Investment Partners, LLC, mentioned that “ESG makes for great virtue signaling, but not great investing.” For example, an investment in solar power may appear to be environmentally beneficial on the surface from an emissions reduction perspective. However, this may be negated by the widespread mining required in production which depletes natural resources along with the exploitation of low-cost labor.

Ultimately, the degree to which a firm decides to use ESG is at their discretion. Michael Kornman of NCK Capital, LLC, said that “we do incorporate ESG in our deal process but don’t use it as a screening mechanism, per se. Historically, we have been more attracted to good businesses when they have positive ESG benefits.” 

There is not necessarily a right or wrong answer for how a firm can incorporate ESG into an investment thesis, but the subject is gaining momentum and presents many potential opportunities for firms looking to differentiate themselves by effectively adopting ESG strategies. 

In the last couple of years, ESG issues have begun to make more of an impact on companies that have shown dedication to these causes. Companies have an obligation to address ESG issues to the public and within their own company in matters of procedure. Due to the nature of the changes necessary to change the corporate structure to address ESG issues, the ESG movement must be spearheaded by industry leaders who are willing to function at the forefront of the movement.   

 

References from General Sources:

  1. ESG in Private Equity – Doing Well By Doing Good, Osler Hoskin and Harcourt LLP (available at: https://www.mondaq.com/canada/operational-impacts-and-strategy/961294/esg-in-private-equity-doing-well-by-doing-good).
  2. The Remarkable Rise of ESG, Contributed to Forbes.com by George Kell (available at: https://www.forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg/?sh=421e111c1695).
  3. Five Challenges for net-zero investing, BMO Global Asset Management (available at https://www.bmogam.com/ca-en/institutional/news-and-insights/five-challenges-for-net-zero-investing).

By Lou Sokolovskiy, Founder & CEO at Opus Connect
November 2021

Will the SPACs Boom Continue?

Will the SPACs Boom Continue?

 

In the past few years, special-purpose acquisition companies (SPACs) have been all the rage. Despite a recent slowdown in their growth, Goldman Sachs predicts that SPACs will drive $900 billion worth of deals over the next two years. This prediction is based on a forecast from April, showing that although there has been a slowing boom, deal-making by these firms could still reach historic highs this year and next.

The question remains: will this type of company continue to be popular among investors?

The answer is no if you ask Clay Risher, director of business development at TrueNorth Capital Partners LLC Stamford, CT.

“I think that trend is going to sort of start to diminish,” he said, adding that things will eventually revert to the traditional merger model.

A SPAC exists only to buy a company or companies of its own choosing and is structured as a publicly held entity. In exchange for the cash SPACs receive from investors to finance their acquisitions, they offer shares at a discount on an open market that can be traded on public exchanges like Nasdaq or NYSE. Many companies choose to go public via a SPAC rather than a traditional IPO because of the reduced risk and costs associated with going public.

Despite the slowdown, major SPAC deals continue to be announced. On Wednesday, Pagaya, a US-Israeli fintech startup, reached a $9 billion deal to be acquired by a SPAC called EJF Acquisition.

Jonathan Bluth, Co-Head of Healthcare at Intrepid Investment Bankers LLC in Los Angeles, Ca, believes that SPACs are driving up merger and acquisition (M&A) valuations.

“For more than a year now, SPACs have been setting the pace with strong valuations.  SPACs can gain shareholder approval to pay big numbers today based on the promise of future growth potential, and can offer a substantial amount of equity currency to go out and make aggressive acquisitions.  This has caused private equity investors and other traditional strategic acquirers to re-evaluate how they pursue attractive companies, so they can be competitive,” he said.

“Intrepid recently advised one of our clients in its sale to an acquirer that had recently gone public via a SPAC, and the outcome was very attractive for everyone involved.  It is unclear how long this SPAC window will be open, but sellers should consider SPACs in their processes for as long as they can continue to offer strong valuations,” he added.

Others are not as confident. For example, Robert Whitney, managing director of Seale & Associates in Arlington, VA, doubts that this boom is anything more than a short-term trend.

“SPAC activity has ebbed and flowed several times over the 20 years or so I’ve been in M&A” he said.

“Their popularity seems to cycle through every ten years or so as a potential solution. Ultimately, I think there are many other factors that are going to continue to drive the overall market – such as liquidity, cost of credit, age if business owners, ongoing changes to tax code, and on and on. So, you know, with SPAC or without SPAC, I think it’s going to continue to be a very frothy environment for the next 12-18 months, if not beyond that,” he added.

Tell us what you think on LinkedIn, Instagram, Facebook, or Twitter! @opusconnect.

By Lou Sokolovskiy, Founder & CEO at Opus Connect
October 2021

7 Simple Steps to Getting the Most Out of Online Networking

7 Simple Steps to Getting the Most Out of Online Networking

 

With COVID-19 entering a new phase in the form of the Delta variant, the challenge of balancing in-person and virtual events continues. For some, transitioning to virtual events has been an easy switch, for others, a bit more of a challenge. Here are 7 simple steps on how you can get the most out of your future online networking event. 

1. Embrace the Change
The world has turned digital and we are lucky to live during a time in which technology allows us to stay connected from the comfort of our homes. The virtual space is designed to accomplish all that you would in the physical space, so if possible, learn how to navigate it in advance so that you can get the most out of the platform at the moment. Virtual events are a great addition to your business development that are not going anywhere so take advantage of them!

2. Look the Part
Even though it is just a virtual meeting, it is important to dress like you are attending in person. Being in formal business attire gets you in the right mindset and makes you look professional. Make sure to sit in a well-lit area so that everyone can easily see your face and expressions. Having proper “zoom etiquette” when attending a virtual event will ensure that the meeting runs more smoothly, professionally, and efficiently.

3. Do Your Homework
Before attending any virtual event, take advantage of all the networking methods available. Make sure to complete your profile on the relevant website by updating your contact information, linking your updated LinkedIn profile, and taking all the necessary steps to make yourself as easily accessible as possible. Find out who else is coming to the event, connect with them, and see who’s available to share deals on the platform. 

4. Keep it Concise
Be sure to have a brief and informative elevator pitch that clearly explains what you do and how you can help others achieve their goals. Opus Connect recommends 20 seconds for an effective elevator pitch. It’s important to note that side conversations can be especially distracting, for that reason we recommend keeping your microphone on mute when not speaking. Virtual meetings require more thoughtful communication to keep everyone on task and respect people’s time. 

5. If You’re There, Be There Fully
Don’t just be a wallflower, make sure to participate to a tasteful degree. If you have something interesting to say, make sure you do before the moment passes. Even if you are simply introducing yourself and asking a question pertinent to the topic, you would be surprised how many connections you can create by putting yourself out there and establishing an initial rapport with the audience. 

6. Enjoy the Breakout Sessions
Ask questions during sessions to better understand the other company’s business and offerings. You can also then discuss these topics in more detail with others when chatting with participants. To get the most out of virtual events, it is really important to arrive early and try to stay until the end. We all have busy schedules, but keep in mind if you show up late or leave early, you may miss out on valuable opportunities to network with others who weren’t able to stay either. 

7. Follow Up
Once you do start networking and interacting with participants and sponsors, be sure to follow up in a meaningful way to solidify the relationship. Talking about these new business ideas, people, and concepts helps you remember key points and process the new information. Whether through email, social media, or a one on one follow-up meeting, simply providing a comment on a topic can set you apart and lead to amazing networking opportunities. 


Today there are so many more opportunities to attend online events that never existed before to network and learn from a wider range of people. Now that you have read our 7 simple steps for attending, we hope they will give you the boost or confirmation you need to have a great experience at your next virtual event. These historic times are certainly forcing us to reinvent ourselves, and online networking is no exception.

Tell us what you think on LinkedIn, Instagram, Facebook, or Twitter! @opusconnect.

By Lou Sokolovskiy, Founder & CEO at Opus Connect and Anna Adamian, Content Marketing Associate at Opus Connect
September 2021

What Did Global Supply Chain Disruption Mean for the M&A Market?

By Lou Sokolovskiy, Founder & CEO at Opus Connect
July 2021

What Did Global Supply Chain Disruption Mean for the M&A Market?

 

A noticeable impact of the deadly Covid-19 pandemic has been the disruption of overseas supply chains for U.S. products. This has led to a spike in commodities prices that have been passed on to consumers. The resulting loss of consumers’ purchasing power coincides with an unprecedented level of mergers and acquisition (M&A) activity.

Data compiled by Refinitiv show that a total of $2.4 trillion in deals were announced from January through May, an all-time record. While it’s hard to know for sure how much of this growth was the result of supply chain disruptions, they do appear to be a significant factor, according to several M&A experts I have talked to.

Experts say that Covid-19 disruption in some industries created a situation where investing in competitors became more attractive than building a business from scratch.

“What I do understand is some businesses that I have connections with have been significantly impacted with regard to the competitive cost of goods primarily because of being dependent on an overseas supply chain,” said Bill Wilkins, founder & managing partner of MSI Capital Partners, a Pennsylvania-based lower-middle market investment firm.

“So that is prompting them to look at strategic alternatives, which could include the potential divestment of the company,” he added.

Wilkins explained how the rise in logistics costs impacted many businesses’ ability to produce and sell products.

“If you were looking to be able to bring in bulk material or bulk minerals, which is our business, whereas we would potentially be able to bring in bulk landed cost with a logistical cost of 40 to 60 bucks. The logistics are near somewhere between $130 and $180,” he said.

US-China Trade War

Jeffrey Kabot, managing director of MezzCap Partners, a Los Angeles-based private equity firm, explained that it has become harder for some companies to import products from China. It all started with the US-China trade war, where both countries imposed tit-for-tat tariffs during the Donald Trump administration. Most of those tariffs remain in place today in the Joe Biden era.

“Obviously, we got hit with the tariffs,” Kabot told me. “When those got imposed, there were some price adjustments, but the flow of goods was still fine.”

“I think the challenge with China right now is more [about] shipping and logistics,” he told me, explaining how shipping from China now takes to a destination such as Florida takes months.

Greg Russell, a managing partner at West Front, said that virtually every company he has dealt with in recent months has been affected in some shape or form by the Covid-caused supply chain disruptions. [Could not find his LinkedIn]

“All kinds of issues arise from supply chain disruption,” said Russell. “It impacts your cost. It impacts timing and impacts customer satisfaction issues. So, it’s really been a very meaningful challenge, I think for all operators out there and owners it’s created financial result, volatility as you pointed out, Lou, some of that’s been positive.”

“But I would say it’s probably been more negative just because of the volatility component to it. Businesses and operators don’t necessarily like volatility. They like predictability, and so it’s that’s made it difficult,” he added.

Some materials are more challenging to import than others, according to Drew Stevens, managing director of Missouri-based Wisdom to Wealth, a financial advisory firm.

“Wood is taking anywhere between three to four months to obtain, whereas light bulbs and copper, you know, the filament for the light bulbs and even cams and trusses were building materials for roofs are all being delayed by anywhere between say six to eight weeks,” Stevens told me.

“And then you’re seeing that in places like the Wall Street Journal, that supply is not able to hit the demand because builders cannot build houses quick enough because of that lack of supply chain as an example,” he added, citing an article published recently in the Journal titled, “U.S. Housing Market Booms, but Small Contractors Miss Out.”

The article included interviews with small business owners in the construction industry who had to cancel projects because of shortages of supplies or workers.

The Impact of New Covid-19 Variants

While the world has made significant progress in containing Covid-19, there have been reports of new airborne Covid-19 variants, potentially more dangerous than the original. Some countries are already taking new measures to seclude international visitors as hotel quarantines no longer seem sufficient.

The new strains indicate that we might still have a long way to go before things for businesses and consumers fully return to normal, and M&A activity is likely to remain high for the foreseeable future, contrary to the pre-Covid-19 fears.

“We keep thinking that we’re out of it, but now you’re picking up the papers, and we’re seeing that variants now are playing a huge role,” said William Henderson, managing partner of Venture Catalyst Partners LLC.

“Some of these dislocations that are happening in the market were a result of the pandemic may still continue. So that’s something that we’re considering. We think that the demand that’s been pent up that people were expecting to be released won’t be in a position to be released. So, it’s still going to be the state of demand for goods and products,” he added.

In early 2020, Congress passed Paycheck Protection Program (PPP) to help businesses hurt by Covid-19 continue to pay their employees as they rode out the economic storm. With that gone, Wilkins with Capital Partners expects that more companies will now be forced to file for bankruptcy and liquidate their assets.

“I think you’re going to have situations where there’s going to be more companies in distress,” he said.

“Because it’s very clear to me that the PPP and other related benefits, which have been incredibly helpful to saving companies from going to the wall … but ultimately it is going to be particularly tough when you marry up liquidity in addition to increasing labor demand and competition. It really will be somewhat Darwinian relative to who survives and who doesn’t,” he added.

Tell us what you think on LinkedIn, Instagram, Facebook, or Twitter! @opusconnect.

Is Biden’s Proposed Tax Increase Fueling Unprecedented M&A Boom?

By Lou Sokolovskiy, Founder & CEO at Opus Connect
July 2021

Is Biden’s Proposed Tax Increase Fueling Unprecedented M&A Boom?

 

In recent days, the media has been abuzz with reports of a booming mergers and acquisitions (M&A) market. The first half of 2021 saw $2.5 trillion in deals closed, according to Bloomberg, which is unprecedented. Is the prospect for a rise in capital gains taxes by the Biden Administration one of the contributing factors to this recent boom? We asked some of the country’s top M&A advisors for their take on the issue.

Justin Schoenberg, an Atlanta-based vice president for investment banking at Stephens, believes that Biden’s attempts to nearly double capital gains taxes is one of the factors contributing to recent M&A activity.

“If you’re an entrepreneur and have a business where your capital gains can double and go from 20% to 40% overnight, you’re effectively weighing that against the future growth of the business,” he told me recently. “And at some point, you’re better off just selling now, as opposed to trying to continue to grow your company and get it to a higher point only to pay a higher tax rate,” he added.

The tech industry leads M&A activity this year with deals worth more than $671 billion. Bryan Cummings is the Managing Director and Head of Private Equity Coverage at DA Davidson, a company with dozens of offices in the country specializing in wealth management, capital markets, investment banking. Cummings does not attribute the tech industry’s increased M&A activity to Biden’s tax plan, whose impacts he describes as “sector dependent.”

“If you’re a high growth technology investor, you don’t care that much,” he said, believing that there is more significant growth potential in tech than some other industries. “We see lots of runway for technology and the integration of software into the broader industrial consumer economy, and so people are willing to pay up for that opportunity,” he added.

With the Democrats being in control of both the House and Senate, analysts say it is likely that the proposed capital gains tax will pass next year. The proposed tax increase from 20% to 39.6% will impact families earning at least a million dollars a year.

Jim Lawson, chairman at Lincoln International, believes the impact will be more on the lower middle-market businesses than the Fortune 500 companies.

“I think the upper end of the middle market will not have as much of a drop in it because it’s very much PE [private equity] oriented,” he said, echoing views expressed in a recent Citigroup note published in the media. Citigroup explained that the proposed plan would affect individuals in private equity, not alternative investments themselves.

Those running family-owned businesses should be most worried about the proposed tax raise, according to Jeff Johnston, managing director & head of M&A at KeyBank Capital Markets.

“I think there’s no doubt that’s having an influence probably mostly for you know, entrepreneurs or family-owned businesses,” he said. “We’ve talked to a lot of business owners and family, you know, people whose name is on the door, the company name is after them really thinking about this,” he added.

Tell us what you think on LinkedIn, Instagram, Facebook, or Twitter! @opusconnect.

Just Keep Swimming: The Debt Landscape in 2021

By Lou Sokolovskiy, Founder & CEO at Opus Connect
June 2021

Just Keep Swimming: The Debt Landscape in 2021

Most business owners will turn to debt financing at some point as a source of funding for their operations. In middle-market M&A, debt providers have a number of avenues when working on closing deals and can also partner with other lenders and debt providers. Opus Connect CEO Lou Sokolovskiy spoke with managing directors, business development officers, and other high-ranking associates across a number of industry verticals to take the temperature of the debt market.

The typical biggest challenges of 2020 – adapting to the impact of Covid-19, a global shutdown in travel, and pivoting to digital meetings instead of in-person handshakes were all felt by debt providers. The “lack of viable prospect opportunities,” as Allan Gibbel, Business Development Officer at Utica Leaseco, LLC., was felt throughout all markets, with a lower quality of deals present and the related challenges of PPP loans making debt lending unnecessary for some companies that may have sought out debt financing otherwise. Another challenge detailed by Paul Schuldiner, Executive Vice President at Rosenthal & Rosenthal, is described as “shifting existing portfolio clients with the problems they encountered relative to sales and maintaining profitability in 2020.”

In asking the Opus Connect Community about what deals closed and which were not successful, there were similarities and trends echoed in other industry verticals that we’ve written about on our blog (link out to a previous article or two) in that healthcare, technology/software, and retail via e-commerce were the most successful. However, Allan Gibbel noted a distinct upward trend in “industries that are out of favor with traditional lenders,” such as CBD/marijuana dispensaries that are providing an opportunity for growth as more states legalize.

Tim Davitt, Managing Director at Kayne Anderson Capital Providers, prefers to stick with what has been successful in the past as the markets weather pandemic volatility: “Most of the new things we did were related to the existing portfolio companies or with private equity firms that we knew very well. And in the last quarter, deal flow really picked up.” This strategy can work for some, but not all industries and lenders.

Regarding deals that couldn’t be closed, competitive pricing pressures in the market as well as “a lot of pressure in the banks” were frequently cited. “More importantly, it’s been more difficult for businesses to rationalize our cost to capital,” as Allan Gibbel states. Charles Perer, Co-founder and Head of Originations at SG Credit Partners, echoed the sentiments of other deal professionals: “Three types of deals we cannot close are 1) truly affected industries like restaurants, 2) the companies that were way over leveraged to begin with, and 3) incredible friends and family competition” when it came to seeking debt financing. Several of the interviewees mentioned PPE companies that failed to execute properly and were therefore not able to deliver on promises made fell into this category, demonstrating that with every crisis comes opportunity and demand for impact mitigation, and some companies failed to perform.

To close out this first part on the debt sector of middle market M&A, the below graphic shows which sectors are predicted to have a shortage of capital throughout 2021. As Karina Davydov, Managing Director at Gemino Healthcare Finance, states, “Usually the deals that we could not close are either because of credit quality or overall health of the company.” The following sectors are certainly experiencing their own challenges in 2021:

Partnering with other debt providers can improve collaboration and cultivate both new and existing business relationships. As Nick Payne, Director at Siena Lending Group,  states, he tends to work with other debt providers in two ways: “…working together on the same deal and being collaborative in referring each other to deals that aren’t quite a fit for us or for them.” Consider implementing this strategy in your own network to strengthen business connections – by paying attention to the needs of other deal professionals, you are planning for long-term relationships in the middle market.

Another way to partner with other debt providers is to follow the model that Karina Davydov discusses: “We actually work quite well with other debt providers because we’re asset based. We typically don’t compete with traditional banks, but partner really well with investment banks, larger healthcare lenders, or real-estate-only providers.” Each industry is unique in its own way, but traditional banks and other asset-based lenders came up frequently in Lou’s discussions with the Opus Connect community. Sami Altaher, Executive Director at FGI Finance, notes that “We are an asset-based lender, our role is to provide the revolver; many of the transactions we work with tend to have need for a revolving line of credit.” Margaret Ceconi, Senior Managing Director at Encina Capital Partners, similarly mentioned revolving lines of credit: “Typically, we do joint participation and revolving lines of credit. We do work a lot with other lenders.”

In inquiring what percentage of business comes from other lenders, the diverse interviewees for this article gave a wide range of responses. Estimated figures were all over the place, ranging from 5% to 80%, with the majority hovering around 30% to 40%. Essentially, the data here reflects the various industries that these debt providers are doing deals in, proving that each deal and company has a unique set of circumstances when it comes to receiving business from other lenders. This is good news, however, and encourages deal professionals to approach each deal with a fresh perspective and the possibility of working with other lenders to complete deals.

On the flip side of the above, many debt providers will partner with equity providers to fill the gap. Bob Colgan, Senior Vice President at Blacksail Capital Partners, described his approach: “We tend to work with equity providers in that we’ll look at the asset stack, provide a number that we can provide the debt on, and then they back fill for the equity around that, and we partner with them to some degree to provide as much liquidity as we can on the  assets and let them do the equity from there.” Other responses noted the frequency of partnering with equity providers, whether they are private equity lenders or traditional and independent sponsors. A handful of respondents quantified their working relationship as working with equity providers about 50% of the time, indicating their overall importance to middle market M&A. Steve Healey, Managing Director, Utica Equipment Finance, asserts that “we think we’re a good fit for independent sponsors. We can bring a lot of value as independent sponsors are generally  looking for a fair amount of capital- senior debt, sub debt and equity – to raise. We’re very eager to do a lot of work with independent sponsors. It’s a big area of opportunity for us.”

A few more responses to this question are worth highlighting – do they apply to your deal pipeline?

  • “We support financial sponsors on mostly leveraged buyouts for auction processes that they’re involved in. We’ll come in for acquisitions, add-on opportunities for sponsors that are trying to expand bank facility or perhaps refinance it with more favorable terms after the platform company has grown.” –Alex Rigos, Associate at LBC Credit Partners.
  • “We are comfortable providing leverage in a leverage buyout scenario for the target business to be the lending credit for the target business and draw down against the assets of the company for the buyout. We also work with a number of private equity firms for recapitalizations of current portfolio companies.” –Graham Bachman Director at Context Business Lending.
  • “We have 19 originations professionals located in 12 offices across North America that allow us to directly originate in both the private equity space and also the non-sponsor space, where we focus on entrepreneurial companies, family companies, and public companies. –Stuart Aronson, Chief Executive Officer & Group Head at Whitehorse Capital.

Finally, we asked what our deal professionals expect the rest of 2021 to look like – is the outlook good? Rich Davis, Senior Investment Manager at Aberdeen Standard Investments, leads the way by noting that “I think 2021 is going to be an interesting year. I think there’s going be a little bit of hangover of a lot of credit that may be challenged, some of which may come back faster than others and so it will be interesting to see what happens. A lot of the government programs and a lot of things help provide liquidity for companies through a certain bit of time but there seems to be a fair bit of “tired” lenders in the portfolio, a lot of which who are looking to get out this year. I think we’re also going to see aggressive sponsors that are trying to make acquisitions in 2021 and so a lot of them are going to have portfolios that don’t have a lot of dry powder so we think we will see a continued use of NAV lending to help fund more acquisitions.”

Overall, the Opus Connect community is approaching the market with what appears to be cautious optimism. They view the deal market as more active, with businesses having more confidence and presenting deal professionals with a lot of opportunities for closing deals. The general sentiment seemed to be that there are “not as many distressed deals as we think” and that the uncertainty in the market will lead to rebuilding and a back-to-basics attitude that will create slow upward growth.

As global vaccine distribution ramps up and the United States rollout continues at a robust pace, consumers will get back out and start spending again. This is good for traditional and non-bank lenders as deal professionals, having weathered 2020, look to the variety of debt and equity providers that are still present in a recently challenged market. Predictions for the second half of 2021 reflect the reality of those obstacles while looking ahead to a hopeful future.

Tell us what you think on LinkedIn, Instagram, Facebook, or Twitter! @opusconnect.