Interview – Nick Braden with Evangeline Securities
I recently spoke to Nick Braden with the investment bank Evangeline Securities with offices in New Orleans and Lafayette, Louisiana. With some minor edits, the transcription below captures our conversation surrounding middle market investment banking. (Italics text are Nick’s words)
I’m Nick Braden, the managing director and co-founder of Evangeline Securities. We are a lower middle-market focused investment banking boutique with offices in New Orleans and Lafayette, Louisiana. We help lower middle-market companies raise both debt and equity capital as well as help them with buy-side and sell-side M&A.
We typically work on deals anywhere from $10 million up to $100 million. Our sweet spot is probably $25 – $30 million.
How do you generate deal flow?
The three founding partners are all native Louisianans. We actually met at the same Wall Street firm 15 years ago in New York. I think a lot of our deal sourcing comes from connections that we have. My family, for example, has been in this area for five generations and I have a vast network from that. Consequently, we often focus on the Gulf South.
Besides personal connections, we have professional relationships with other transaction professionals – accountants and attorneys are particularly helpful. We also have a number of friends in the insurance industry and in the private wealth management sector who are very helpful.
Do you actively go out and make connections with that referral network beyond friends and family or has that just come with time?
It’s really been a domino effect. We have contacts with several prominent law firms in the area and it becomes this exponential growth of contacts through that.
We have made a lot of contacts through the Association for Corporate Growth.
We made a lot of contacts through the Greater New Orleans, GNO, Inc. They have their finger on the pulse of a lot of different businesses in this area and have introduced us to a multitude of people.
But that first initial contact has normally come from a personal contact. We really build upon that and try to meet additional partners who focus on different segments. For example, at a law firm, we will meet the Oil & Gas Partner, the M&A specialist partner and the partner that focuses on Industrial Services and Niche Manufacturing. We try to use our connections to make more connections at the same firm or at other firms.
What common themes do you see that make transactions difficult to close?
We are very much focused on efficient use of our time. It is very easy as a lower middle-market firm to, in your early years, take on assignments that are really too difficult to consummate, but you have a relationship or you have a very eager CEO and you become engaged in some difficult transactions.
One theme – companies that are far over-leveraged, who waited too long to contact us. For example, the Oil & Gas sector. A lot of businesses down here have really never had exposure to investment banking specialists. They are familiar with commercial lenders and that’s the extent of their exposure to financial professionals. They don’t realize that we could help them in times of need before things get too bad, where they are barely making payroll. So that’s really been one of the key problems – somebody coming in way too late and not having any kind of experience getting out of a jam and then showing up on our doorstep saying look, I can barely make my payroll this week, what can you do for me now? We will still take the phone call. We will sit down with them, but that seems to be a case where they often don’t want to hire an investment banker or pay any kind of service fee.
Do you find companies now know more about investment banking or is it still nebulous to business owners?
In our neck of the woods, in the Oil Field Service businesses and south Louisiana, there are a lot of companies in the $20 – $50 million revenue range. Many of them have not had exposure to licensed investment bankers. Sometimes they have only had exposure to business brokers who literally put them in a newsletter and blast them out, which we consider comically ineffective. Half of our pitches still involve investment banking 101 – what do investments bankers do and why we are needed.
A lot of times we have to explain to them that it’s through a robust auction process and through our relationships with potential capital around the country that we can generate an auction process where they are going to get far better terms than they would ever get by themselves. Plus, we have to explain to them how we alleviate the burden of actually finding that capital or finding that acquirer. Typically, they are looking to sell their business and they’ve only been talking to one maybe two different companies who are in their industry or are a competitor. They’ve never explored the full set of opportunities. So, yeah, we are still seeing there is a lot of market education needed.
Have any recent deals produced something insightful that other bankers might find interesting?
On the buyside, there has been this huge proliferation in lower middle-market focused private equity and mezzanine shops around the country.
When we are doing a deal for a company and putting together a bespoke list for that business – whether it be family offices, private equity, mezzanine shops that focus on this industry and deal size – it seems that the buyside often doesn’t quite get that they are part of a much larger process. I think that’s where it’s interesting to me, that they are shocked sometimes when they realize that when we are pushing them on terms and for a process timeline, there is real competition behind the scenes.
This is something I think private equity guys should be aware of in the lower middle-market. There has been a big surge in requests from our clients on the sell-side for family offices as opposed to traditional private equity… for many reason, including their belief that it would be patient and less demanding capital.
You have CEOs that are scared for their employees. The employees fear change of control transactions. They think they are going to just be flipped again in four or five years. Plus, they worry about downsizing and cost cutting. CEOs have heard war stories of private equity buyers coming in and doing so much cost cutting. So, there has been a big request to go to family offices that seem to be a little bit of a kinder, gentler capital and a little less hands on than a traditional private equity firm that is truly sitting there counting every penny toward the appropriate return. We’ve definitely noticed that in the market.
Right now, valuation multiples are high, (maybe not in oil field services). How has that impacted how you approach potential clients?
We have seen some healthy multiples out there in a number of industries. There are healthy multiples in the industrial services side and the manufacturing side. Certainly, not oil field services.
The issue becomes – is the company choosing the right time to go to market? A lot of times we see a company that has one or two years of good performance and then they want the top multiple. We tell them we can try to get that top multiple, but you are going to be penalized for not having a three plus year track record of success. So those processes become more difficult. From our standpoint, before we ever go to market, we tell our clients exactly what valuation we think they are going to achieve. We give the option, saying if you don’t agree with this then that’s fine. We’ll part ways as friends and let bygones be bygones, but we’re not going to go out there asking for $50 million for a company when we think it’s worth $30 million. That would be a problem. So we just don’t take on the assignment.
For the most part, it’s worked out. We will do the full valuation analysis and walk them through exactly why we arrived at that valuation. We are very good at picking that correct valuation range. It’s really about having the same expectations on both sides at the point of going to market. Otherwise, you’ll get yourself in trouble pretty fast.
When you are pitching a new client, do you run across competition who pitch an unrealistically high valuation to win the business?
We had a company bought in the Gulf South that was in the energy space. They weren’t having a great last 12 months and they needed an equity infusion. They preferred a minority equity deal, which is typically more challenging for a company on a downswing. When we presented our terms, we were told our success fee was too high. We were very confident in our success fee and had actually spoken to some other investment bankers in the space to see what they would have charged. We had a good grasp on what was appropriate. We were surprised that we lost that deal over the success fee. There is definitely competition that wasn’t there before, but I think if we do things the right way as fully licensed registered broker dealers, with substantial experience doing purely investment banking and with bulge bracket Wall Street experience then companies should compensate us for that.
Do you see oil pricing going up from these recent lows?
I don’t think we have clear visibility into near-term recovery. There are businesses that have cut costs and are trying to live in this new sub $50/barrel range. Unfortunately, recent OPEC attempts haven’t done anything to bolster prices above $50. I don’t think we are in a situation where we are going to see above $50 at a stable level for a while. I certainly don’t see it in 2017. That doesn’t mean there aren’t still good companies out there that need capital.
I had a meeting on Friday with a business in the Gulf South where they were doing $130 million in revenue in 2014 and now they are doing $65 million. That’s not an uncommon story. They were talking about difficulties with commercial lenders and needed to be refinanced. We can certainly get that done for them, but obviously, it’s going to be more expensive capital compared to their original bank line. It’s a challenging market, but from an investment banking service provider side, we still think we can pick some winners that can get things done.
What are the growth prospects for your own firm, do you plan to add to your team?
We are always happy to add specialists. We are certainly happy to speak to partner-level types who could bring expertise to the table.
We don’t do deals where we don’t have a strong fundamental understanding of the industry. Our big thing is, who can bring value to the table in a culture of doing things the right way. We have a certain expectation of service and work ethic. We are open at the partner level.
Your firm is licensed through Independent Investment Bankers (IIB). What was your decision process in choosing IIB?
We spoke to a number of firms before launching on IIB. Frankly, we found Dante Fichera far more accommodating, easier to deal with and willing to move fast. We brought over three clients immediately. He was really helpful in doing that in a seamless way. He was very fair on pricing and he made himself available to help us move very quickly in a challenging situation. We are very happy with IIB. We have no intention of leaving anytime soon.
For Business Owners – there is a huge network of private equity out there. From a business side, people are selling themselves short by not exploring that. It’s important to do it right and hire a professional to quarterback that process. It is far too difficult for management to do that by themselves. The outreach, the coordination of efforts and the diligence questions are too much of a burden on management. It takes away from their day job. Business owners should know that.
For Investment Bankers – choose your clients wisely. If you are doing $10 million or $50 million deals, it’s the same amount of work. Be strict on your efficiency and don’t get dragged down by relationships that are not mutually beneficial.