"The current macro disruption is ongoing, and it’s not yet clear when it will end" – Q&A with Michael Kalb, co-founder and managing partner of Navaid Equity Partners

Fort Lauderdale

Navaid Equity Partners was founded in Fort Lauderdale, Florida (pictured), in July this year to invest in quality businesses in solid industries where there’s potential for growth in the underlying business, but where the business is facing some external type of disruption – either a macro disruption such as the Covid crisis or a micro or acute disruption including succession planning issues, management change, or a plant relocation. The firm focuses on small to medium sized businesses with revenue up to USD 500 million in industries with strong fundamentals and future growth potential.

What’s in the pipeline?

We focus on industrial, manufacturing, business services, chemical, packaging businesses, and some consumer product companies. Those are the sectors where we’ve differentiated ourselves, so those are the sectors that we want to focus on with the new firm. 

What type of companies are you focusing on?

In the last two months we’ve seen around 150 deals come across our desk. We took a deeper dive with about 45 and a handful of them were interesting. Most of the businesses that are facing some type of headwinds from the pandemic, we are not pursuing at the moment.

We believe this is not the right time to go after those deals, because there isn’t sufficient visibility in the economy to know which way they are going to perform following the disruption. 

The situations that we focus on are businesses that have very specific issues with their companies. One example is a packaging business that is family owned but where they have not invested properly to capture the incremental growth that is occurring in the market.

There's a lot of businesses in the market that are performing poorly, and they might not have a reason to exist, and they will go by the wayside. But there are businesses where we are seeing declines, but that should ultimately come back. It needs to be the right time, once we have the right visibility. You need to be very selective regarding where and when you have visibility.

What’s one of the main issues that companies have had to face during this time and what advice will you be giving companies?

I have been through three prior economic cycles and I've seen the impact that recessions have on businesses. If I go back and look at when good investments are made, I've found that they are made 12 to 18 months after the disruption. That’s the time when you should have visibility of what the true capital needs of the business are, and structure a transaction that makes sense for the business.

This is a unique situation in that the current macro disruption is ongoing, and it’s not yet clear when it will end. It’s predicated on outside forces, ie a vaccine, and the ramifications are so deep that all bets are off as to what the liquidity needs will be, what the timing is going to be. It will require a really deep dive to truly understand the businesses and how they are being impacted to figure out what is the baseline, or the floor in terms of their performance and then making sure that the business has the right balance sheet, management and strategy to withstand operating on that floor until the overall market comes around and they can see growth again.

What will be the most important shifts in the PE world going forward?

The private equity world paused for a few months when the crisis first started. But there's still a tremendous amount of liquidity in the market where people are chasing yield. PE firms are looking to continue to deploy capital for the sake of generating yield. Deals are being made where investors may not really have true conviction in the underlying businesses that they are investing in. That can create issues down the road for many of the investments that are being made right now. Yes you want to generate a proper risk return scenario. At the same time you need to have conviction of the underlying business. The private equity industry used to be a craft; conviction-oriented strategy, but is now a strategy of money management and chasing yield.

What’s your view on the exit climate?

There's a lot of exits in the market today where firms are looking to take advantage of other firms' desire to chase yield, and where values are remaining robust at the moment.

What do you think about the current fundraising environment?

For established funds, where they have established investor relationships, they've been able to go out and raise funds even in this market. For new funds that are looking to establish new relationships where LPs are not yet able to perform their typical due diligence on new funds, it's becoming complicated to get a new fund done, but not impossible.

Can due diligence be done virtually?

I think it’s an evolutionary process. We’re slowly recognising that virtual business in general is possible; we’re now going into the winter months and this started last winter. People are learning to do business broadly virtually, and that’s starting to extend to the fundraising market, albeit a bit slower. We have been meeting with all of our prospective investors virtually.

How do you envision the new normal?

I don't know what the new normal is. It will be difficult for anybody to figure out what that is until we see how things evolve in the next 12 to 18 months.