Full Interview Manuscript:
Ruby Sheera (RS):
Hello, everybody.
I'm here today with Laura Maddison from Raymond James.
Hello Laura, lovely to see you.
Laura Maddison (LM)
Hi Ruby
Ruby Sheera (RS):
A little bit of background as to who Laura is.
For those who don't know her, she specialises in the technology and services sector
and is one of the founding members of the London Raymond James team, which she joined, I think, in 2017.
Is that correct?
Laura Maddison (LM)
Yes. Yes. It feels like yesterday.
Ruby Sheera (RS):
It does indeed.
Laura has over 18 years experience of advising private equity, corporates, and entrepreneurs on deals across the breadth and depth of the technology and services sector
which includes areas such as EdTech GRC, ESG, and marketing.
And she joined, I believe, Raymond James from Deloitte, where you were responsible for
M&A for the TMT team there.
Laura Maddison (LM)
Yes, as a director in the lead advisory team covering TMT or TMT was kind of the old name
for tech and services.
So similar coverage, but just a slightly different badge.
Ruby Sheera (RS):
Fantastic.
Now we're here in 2023 talking about the state of the market.
Thank you very much for making time to have a conversation with me.
I'm sure there are lots of people that been very keen to understand your thoughts and comments.
So, what I would probably like to start with if I may, is just a general sort of commentary from you as to what you think the market has ready for the year ahead.
Laura Maddison (LM)
Yeah. So, look, I think it's an interesting topic to open up on, the state of the market.
I mean, there's lots going on as we've seen through the headlines.
I think the headlines about the financial markets have been pretty deafening.
Whether that's through, the rising global inflation rates
fuelling the cost of living,
the energy
crisis in Europe,
which has led to interest rates as we've never seen in the last 15 years.
And then flipping that into kind of the lower GDP growth environment
and the kind of recessionary concerns that are growing across all geographies,
but particularly in Europe,
it's fair to say that has some interesting implications for M&A and kind of what we're seeing.
And for me,
they fall into a few different categories.
So principally
on the debt side,
we have enjoyed, much like in the consumer mortgage market for we have enjoyed
exceptionally cheap debt for a very long period of time
and off the back of our wonderful government and the Rushi, Trust, Lettuce debacle,
we saw that change pretty dramatically,
almost overnight.
So, the kind of era of very cheap debt has gone,
which has implications from an M&A perspective,
because that is the kind of fluid, particularly from a private equity perspective
that kind of keeps Deal flow moving.
So, I think that's a fundamental shift around not only the price of debt,
but also,
the availability of debt.
I think from an investor side we've seen.
and we are going to continue to see
more of a flight to quality.
And what does that mean?
It means
a higher bar,
a greater level of scrutiny
coming from ICs across the market.
And that plays out in a few different ways.
That plays out in the appetite to transact.
It plays out into perhaps slightly longer,
more sustained DD processes,
due diligence exercises
where people just want to check just a bit more and kind of do a bit more in-depth work than previously.
But I think
contrasting that on the investor side,
we're also seeing record amounts of dry powder across the private equity landscape.
You know,
if you go back five years, it's probably almost doubled and its higher than it was last year.
So, you know,
no one can afford to sit on their hands
and similarly, from a corporate perspective,
record amounts of cash reserves.
So, actually, some of the fundamentals remain quite strong,
but there are undoubtedly pressures.
And what does that mean in terms of,
I guess, valuations and volume valuations
We've certainly seen some contraction
I think we'll come to talk a bit more about that later,
albeit again,
it's quite a bifurcated market.
You've got some assets that definitely have,
that kind,
valuation hit,
whereas some of the premium assets are actually still commanding the sort of multiples they might have
achieved 12 months ago.
So, it's quite a bifurcated market
and similarly on volumes,
they're undoubtedly down across all geographies,
but that said,
that's comparing it to the very high benchmark of 2021,
which off the back of COVID had just crazy amounts of activity.
So, if you compare them to pre-COVID levels,
they still look pretty healthy and sensible.
It's just compared to that very high watermark of 2021.
They look like they've come off,
and they have.
So, there are lots going on right now
and I think the number one question we get from clients is,
you know, the forward-looking view of what's coming and there are a few moving parts to navigate, I think.
Ruby Sheera (RS):
And I think what you've also sort of summarized that point eloquently is
there's enough here in the coffers
to make people think inevitably is going to have to return.
The question is,
When?
What UK versus the US?
Do you see any significant difference between the US in the UK M&A markets and sentiment towards
activity?
Laura Maddison (LM)
I mean, look,
it's interesting to look
Raymond James, you know,
every one of our deals is international,
kind of every buyer
List of buyers
we go and speak to,
will be across different geographies.
And so,
it's fair to say there is some difference in sentiment.
And I look back
particularly last year at the start of the summer
and there was quite a divergence at that point between I’d say
Europe and the UK and the US.
So, the US
at that point was much more bearish.
I think over in Europe at that point we were still pretty,
pretty upbeat,
about where the market was,
but it felt like the US had turned slightly earlier
and I think
I put that to the fact, that the US probably feel slightly stronger connectivity to the public market valuations,
and they started to come off at the start of last year,
whereas in Europe,
I think particularly
the European Private equity Community
perhaps was slightly more shielded from that.
There's not such a direct linkage to their portfolio.
Fast forward to the end of the Summer,
say September last year.
I think that gap had closed in terms of sentiment.
I think Europe is caught up in its slightly more bearish views.
Interestingly, from a valuation perspective,
I think in terms of differences,
there's probably now a greater alignment between the US and Europe and the UK in terms of valuation.
Historically,
the US has always been,
probably higher valuation environment,
particularly in the sectors I operate in and what we saw was we saw some really high kind of increase in valuations,
particularly off the back of COVID in the US
and they have come off quite markedly. In Europe.
I'd say we never quite got to the same heights
and therefore we haven't quite had the same fall
and we've seen more of a normalization between the two and a similar kind of trend
I'd say deal volume and activity.
So both markets,
geographies are down,
albeit I think the US is probably slightly more pronounced
in its downturn.
I mean,
if I look at our own business,
our year-end is September,
we've had another record
due to September 22 across Europe.
we had another strong Q1,
actually, pretty much in line with the prior year Q1.
Forgive me,
for us,
Q1 is calendar Q4 last year,
US probably slightly,
slightly softer in terms of overall activity levels,
but very healthy.
none the same.
So, there are some subtle differences
that we've seen played through,
but I think some of that has perhaps normalized now
in terms of coming to a more neutral landing point between the two.
Ruby Sheera (RS):
And if we turn just to the tech market and tech M&A,
looking at that specifically,
how has tech M&A been impacted
and how do you view the outlook for 2023?
Laura Maddison (LM)
So, look,
I think it is interesting
because when you take the tech out specifically,
I almost kind of started in the public markets
and see what happened because of the tech sell-off
in the public stocks started to happen pretty early last year and that's been pretty pronounced.
And we've seen that turmoil continue to play through over 2022.
And interestingly enough, some of those SaaS multiples,
as I just mentioned,
the kind of rapid rise and then kind of some of the contractions particularly been seen in those SaaS stocks.
So,
revenue multiples have come off markedly and I think that's all interesting.
But I think
what is more pertinent
is the kind of shift in investor sentiment and preferences around tech.
So, the rule of 40
has always been quite a common metric in terms of looking at tech businesses
and that’s the combination of revenue growth and margin.
Now historically, I'd say
people were sort of less focused on the mix of that rule of 40
Did it come from the margin?
Did it come from growth?
And growth has always been extremely highly valued in tech stocks.
What I’d say
over the last few months or so,
we've really seen a,
It’s back to that sort of flight to quality,
investors are preferring higher-margin stocks over growth
and they’ve kind of..
we've stepped away from the growth at-any-costs mentality
that we perhaps saw
12-18 months ago
and so, I think this has been quite instrumental in how people view the tech sector
and tech M&A
and specifically
such that I think
from an M&A perspective,
say people are more focused on those more resilient businesses
with perhaps
higher margin
and are prepared to forgo some growth to kind of have more resiliency in this market.
And look,
from an activity
and valuation level,
I think we've touched on some of those themes already,
but you know,
volumes are down
if you compare 2021,
albeit
go back to the pre-COVID level,
they look kind of more normalized and more in line.
Ruby Sheera (RS):
And you touched on verticals there
as you look at the tech and services market,
which particular verticals
with subsectors
do you believe
will have the most potential to continue to attract competitive investment throughout 2023?
Laura Maddison (LM)
Sure,
before I come onto specific verticals,
it’s probably just worth again framing what in this kind of market environment,
what are people looking for?
They're looking for resilience.
That's probably the number one factor
and that would have shifted from 18 months ago when,
you know,
in more buoyant markets,
resilience is important, but it's not.
You don't feel it's going to be stress tested in the short term.
You know,
every investor
right now
is very focused on that.
This could become a very real stress test,
you know, day one post-acquisition.
So, they are very focused on what resilience could look like.
A key test around resilience is kind of what I would call mission criticality.
How mission-critical is the service,
the product,
is the software you're providing
because that would help underline how resilient you can be
even if markets do get tougher,
I think then on top of that kind of fundamental factors,
you layer on the sort about margins and growth, you know,
there you've kind of got the key criteria that people are looking for in these sorts of market conditions.
And as I say,
that’s not like a revelationary statement about what people are focused on,
but It’s probably the ordering that is more important in the current markets.
You go back 18 months ago.
it would probably be growth first.
You know,
it might be margined at the bottom of the list.
There's been sort of a turn
So then,
as I come to think about certain sub-sectors of tech
which are most interesting,
I think it plays into all of those themes
and that there are many,
many kinds of subsectors out there,
not only in tech but specifically in tech,
that we feel pretty bullish about,
as we kind of go into the coming month's areas
like governance risk compliance (GRC),
I’ve mentioned ESG.
These are kind of subsectors that have macro themes underpinning them,
which is driving growth,
driving mission criticality.
And similarly, in EdTech,
If you’re a K-12 software business,
you don't just turn off these
these particular capabilities or software
just because the market turns these are mission critical to what's being delivered.
So I'd say that they're a certain subset of software
that we feel pretty bullish around.
what I would just like to carve,
is that I think it's fair to say that it's not the only software that should be seen as resilient
in these markets.
There are lots of tech-enabled services businesses which we feel,
again,
will weather the storm,
you know,
very strongly,
if I look at something like marketing where I spend a bunch of my time,
you know,
B2B marketing is certainly an area that is called out as being one of the most resilient subsectors of the market
because of the kind of buyer dynamics,
they are slightly different to the consumer piece,
not as impacted by things like the cost-of-living crisis etc.
R Ruby Sheera (RS):
One of the other questions I wanted to ask you about..erm Laura
was about the process,
so given the backdrop of the macroeconomic events
that occurred which,
you know,
we kind of touched upon the back end of last year and where we are now.
I mean,
I'm seeing processes elongate
or sometimes
they occur over a more condensed time period
against a backdrop of valuation volatility.
Right.
Will the current market,
in your view change the shape and dynamic of the pre-deal processes moving forward?
Laura Maddison (LM)
Yes,
look,
I'll come to the pre-deal piece specifically,
but I think,
look for me,
there’re two elements to that.
There's the kind of speed of processes that you touched on.
And look,
as I mentioned at the start,
given that kind of higher bar,
I think it is fair to say that on average processes are taking longer
and we advise our clients to assume that is the case.
And as I mentioned earlier,
that's because of high scrutiny,
people want to stress test a bit more
just to be perhaps
more rigorous and thorough in their diligence work.
Albeit
I do want to counter that by saying that we are still seeing,
for the premium assets,
you know,
those businesses can trade very quickly and by quickly,
that could be a matter of weeks.
We're not perhaps seeing the “days” type of transactions
that we might have had previously,
but certainly in a matter of weeks.
And where there is a flight to quality,
but with a smaller pool that kind of meet that quality threshold,
you've almost got more competition.
So,
I do just want to counter that from a speed perspective.
In terms of your question,
around process shape
and pre-process,
again,
I think I see that changing somewhat.
And look,
this has probably been something we've seen a shift
over the last 18 months or so,
not necessarily just in the last few months,
but it previously was the case that you could typically see more broad auction processes,
and by that, you might have a formal IM
that’s going out to a slightly wider,
number of the market,
across different geographies,
and then kind of filter interest from there.
I’d say what we are now seeing is a
much stronger kind of concentration on the more curated processes
where it's a much smaller group of parties
and they probably got more access upfront to have a dialogue,
build conviction to get them comfortable.
I always kind of say,
if an IM is landing on someone's desk
and they are hearing about something for the first time,
it's probably too late because,
you know,
you kind of want to be having those earlier stage conversations pre-process,
letting conviction build over time.
I think that's what we're going to see as a much stronger and stronger theme in terms of
process,
shape and
design.
Ruby Sheera (RS):
The audience I speak to
typically
the chairs or
CEOs or
Owner/Founders of businesses and occasionally investment directors
who is looking to do bolt-on activity for their own businesses?
If you could talk freely to them
and off the record
and what advice would you give them?
to get the most out of any M&A activity that enters during 2023?
Laura Maddison (LM)
So, for me,
I think there are probably kind of three key things I'll call out.
The first is that in this market, in particular, investors want to buy results,
not stories.
And what do I mean by that?
I mean
that perhaps going back 18 months,
two years ago,
you could talk about maybe your growth expansion plans and geography
and you might not have to deliver that many of those plans.
You might have said,
“Look, this is what we're doing”
“This is the plan”
“This is a story around what we're building”
And actually,
that might've been enough to kind of get you through.
I'd say in this current market,
our firm advice
are you need to have evidenced more
of that perhaps then you might have done in the past.
So, I think it's to focus on really showing those results,
delivering those outcomes
and using that in terms of your sales message as opposed to just this is what we're thinking about,
this is how we think about building.
So that would be point one.
I think sort of linked to that is point 2,
a topic which can sometimes sound mundane,
but it's quite close to our hearts
is about preparation.
You know, the old adage of
fail to prepare, prepare to fail.
It can sometimes be tempting as a CEO,
as a founder,
as a chair…
“We've had this inbound approach. We're ready to go.”
“We don't need to do much work.”
“You know, let's just get out there”
That’s the fastest
well way to create a failed process or failed kind of M&A scenario
is when you don't prepare,
because whatever those conversations,
if it's one party,
if it's 10 parties,
100 parties,
you need to have rigorous preparation around your business
to have thought through the data,
because it's much easier to do that out of the spotlight,
you know,
rather than in the glare of the final IC and everything else.
So the preparation piece has always been important,
but I think it's even more fundamental
in the markets as we are currently sat today.
And I think the final piece I would just sort of,
sort of really emphasize,
is that remember M&A is not a one size fits all approach,
and it's a living, breathing thing.
Again, sometimes we have clients who might have a very fixed view on the outcome,
that it will definitely
be trade or definitely be PE,
or whatever it might be,
again in this market,
but true in any market,
you've got to kind of evolve the tactics,
the approach,
depending on what you learn from some of those early conversations and recognize that it might take a few
twists and turns,
it might go in a slightly different direction,
but that's okay.
You know,
you kind of adapt and pivot.
And so I think it's that sort of flexibility in approach.
Again, what I always tell my clients is that my job is to create optionality for as long as possible,
and for that to work best,
you've got to kind of keep an open mind and be flexible
about how things may evolve,
so set your objectives upfront, of course, in terms of what you want to achieve,
but it might mean you achieve them in a slightly different way at the end than you thought you might at the start.
And that's okay.
So, I think that would be my three key pieces of advice in this market, but probably more generally as well. And another question which is unrelated,
Ruby Sheera (RS):
but I'm just curious more than anything is there any correlation, or have you seen any correlation as an industry,
not just purely passive for Raymond James with a potential downturn and the number of failed processes?
Laura Maddison (LM)
So, I, I think I think it's fair to say that there is an enhanced risk of failed processes in these sorts of market conditions.
And I think that coming back to the point we discussed earlier process shape and design,
is kind of another reason why you're going to see much more curated processes.
I think as we go into the next 12 months,
you're going to see fewer of the “auctions”,
IM just formally landed on a desk,
that feels a bit tone-deaf.
I think what you're going to see much more of is kind of early-stage conversations,
people understanding if there is a potential fit
before you get too far along in what's called a process,
and therefore minimizing
the risk of any kind of failure or kind of not executing your objectives.
So, yes, to your question,
I think there is an enhanced risk of that in these markets, undoubtedly, because you know with more volatility, becomes more uncertainty
and it's sometimes harder to call the IC,
the strategic,
you know, what the decision-making is kind of going on there and how they feel about the business.
But I think the way you mitigate against that
is by being more thoughtful and creative about how you set up those conversations.
Ruby Sheera (RS):
Okay.
And I know we're not quite into the downturn
because I think officially,
we're not in a recession,
but everything sort of looking like it is is indicating that way,
but based on previous downturns,
what advice would you provide businesses focusing on an event for 2024
to maximize the value?
Laura Maddison (LM)
I said to navigate the coming months.
That's a good question.
I think it's, it's really easy in these sort of market conditions for everyone to say,
look,
it's really tough.
You know,
it's really hard to find growth,
to find,
you know, positive metrics, you know, off the back of periods like COVID.
I was speaking to an EdTech business this morning,
that said every one of their metrics was from bottom Left to top right,
every one of them,
in reality,
it is probably more likely, that not every metric in the next 12 months will be,
you know,
flashing green.
There might be some amber, there might be some red.
But I think what I would say to businesses,
to CEOs,
to founders,
to teams,
is focused on the fundamentals.
Remember, it's all relative.
You know, resilience can come in different forms.
And I think as long as you can evidence over the next 12 months that you're doing the right things,
you can prove your resilience through maybe the fact your retention is holding strong or,
you know, your growth might have come off, but you might still be growing.
That's still positive that you've delivered strong,
healthy margins.
So I think it's just trying to stick to the fundamentals.
Don't get too swept up in the kind of broader rhetoric and just focus on your own business,
focusing on harmonizing and maximizing what you can so that when you come out the other side relative
to maybe other businesses,
you have performed as strongly as you possibly can.
So I just think it's the old adage isn’t it,
stick to the knitting,
focus on the fundamentals,
be kind of clarity about what you're trying to build and how you do it and be thoughtful
and be able to kind of in that period of,
you know,
maybe we didn't want to cut the headcount
because actually, we're investing for growth here.
So just be thoughtful and considerate about the decisions you make.
And come back to those fundamentals of resilience,
profitability,
growth,
you know,
how do we evidence those? And I think you will be in very good shape.
Ruby Sheera (RS):
Laura, thank you very much.
It's been a pleasure talking to you.
I appreciate it.
Lots of really good nuggets of advice there.
But more importantly,
any sort of reference to a couple of times the old adage,
you know, one or two examples,
I actually think,
you know,
it is an old adage that exists for a very simple reason.
You know,
keep it simple and make sure you stick to your knitting.
You know,
these are key things that our grandmother's probably said to us.
But at the same time,
here we are in 2023,
going into 2024.
And those are the fundamental bits of advice which are critical because I think sometimes people just get a bit lost.
But it's been a genuine pleasure talking to you.
Thank you very much for your time.
I really appreciate it.
Laura Maddison (LM)
Great speaking.
