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Cascadia has established itself as a market leader in the Robotics, Automation & AI (RAAI) sector hosting an annual conference, publishing thoughtful research, and sponsoring events nationally.
 
The Cascadia Connect RAAI 2023 conference was one of the premier events in the sector bringing together founders and investors from all over the world.
 
PBS was on site for this year’s event interviewing participants and put together this informative video that nicely summarizes the market opportunity in RAAI—it’s definitely worth a few minutes of your time if you want to get up to speed on the sector quickly.

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Cascadia has established itself as a market leader in the Robotics, Automation & AI (RAAI) sector hosting an annual conference, publishing thoughtful research, and sponsoring events nationally.
 
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In this newsletter we provide commentary on the current market, as well as a closer look at structured capital.

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Bad and negative market news over the past year has been substantial. Layoffs. Aggressive interest rate hikes. Inflation. Stock market selloffs. Tightening credit. Recessionary fears. Ukraine. Silicon Valley Bank and Signature Bank collapses.

All of this is enough to make your average business owner, and their various advisors, feel the markets are closed for opportunity. However, when you dig deeper into the specific elements of each situation, it becomes clear to us that opportunity has not gone away, only changed form. Depending on which side of the current M&A and capital market supply/demand equation you are on, there are different yet substantial opportunities that remain for middle market CEOs in this current market.

On the Sellside, we have seen that “A” companies - those that have demonstrated continued growth , are profitable, led by deep and experienced management teams, and have no material business issues (i.e. customer concentration, low margins, extensive and unsustainable COVID bumps, etc.) – are continuing to get strong interest and valuations in the market. There remain pockets of industries where these “A” companies are prevalent including food, industrials, transportation/logistics, specialty physician practices, and even sub-verticals within the otherwise battered tech industry. In a very counter-intuitive fashion to the main market news, we are even seeing these “A” companies experience headier interest and valuations than in the past, given that performance through this market stands out with materially fewer companies now being chased by ever-increasing amounts of private equity and strategic buyers.

If your business is not currently an “A” company or in an industry that continues to generally perform well, then opportunities still abound in a different form. We are seeing a substantial number of middle market companies turn their lens toward acquiring smaller or weaker competitors, which can now be executed at potentially lower valuations than the past few years. Additionally, this can be a ripe time to recapitalize inactive shareholders, either exchanging passive or unaligned owners for a value-added and more growth-minded investors, or consolidating and increasing active shareholders’ ownership.

Finally, while the credit markets have generally tightened and become more selective, we still see solid pockets of debt and structured equity capital available to middle market business owners. Tapping this capital often requires a change in mindset for CEOs and CFOs, shifting a 10+ year focus on the lowest cost of capital to an optimized capital structure that can execute growth, recapitalization and/or acquisition opportunities employing more flexible – and more expensive - capital. The trade-offs are not always worth it and require extensive diligence and cost-benefit analysis, but we are seeing more business owners embrace expensive debt with a “cheap equity” mindset from an overall shareholder value basis.

In conclusion, for all of you in the LA middle market community including business owners and those advising business owners, this can be an important time to revisit your strategic alternatives to avoid missing out on opportunities that may not be immediately evident. That said, proceed with caution, ensuring you understand your valuation in this current market to avoid “chasing rainbows” or the distraction of a failed process. Be true and circumspect on whether you fit within the “A” company category, and if you are not able to consider optimizing a sale transaction at this time, then reassess your cap table and acquisition opportunities, if that option is available and of interest.

It is also a perfectly appropriate strategic move to do nothing in this market. That said, we believe you should end up at that conclusion only after fully considering all options currently available, which will ensure you avoid missing any key opportunities to build material shareholder value through this market cycle.

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When you spend years building a business—making countless decisions to overcome challenges and reach stability—no decisions are more significant than choosing a path for an ownership transition or taking on capital to grow. Upon considering the more traditional offerings, such as a private equity investment or sale to a strategic, you may find yourself wishing for an “off the menu” option. That could mean maintaining the business as a standalone entity. Maybe you’d like to avoid debt. Or perhaps local ownership is critical to the company’s future growth.

Cascadia Capital created its Private Capital Group (“CPC”) for companies seeking creative transaction approaches not available in typical processes. We recently had the privilege of closing two transactions under this umbrella—a pair of customized solutions that met the unique needs of two Pacific Northwest businesses.

In a recent confidential transaction, we partnered with a leading independent sponsor and a company’s existing ownership to recapitalize the business to provide liquidity to the founding shareholder and growth capital for organic and inorganic growth opportunities.

In another situation, CPC assembled a group of strategic investors to acquire 100% of OVS Equipment Solutions (now Oregon Equipment Sales), a regional agricultural equipment dealer that was being divested from a private equity backed business. The investor group—including family offices, industry partners, and Cascadia principals with experience in the agricultural equipment sector—partnered with the strong existing management team to execute the transaction.

Both transactions leveraged the core capabilities of Cascadia Private Capital:

Our CPC team works to lead this type of “third-way” transaction, leveraging patient capital and our firm’s relationships with family offices and other long-term investors who want to back mature companies that generate income and wealth for business owners in the Pacific Northwest.

Through our relationships, we encounter many business owners for whom the usual choices aren’t a good fit. Some own businesses that are critical suppliers to giant corporations that are pushing the business to grow or expand beyond the comfort level of the original owners. In those cases, our role is to find sources of capital and additions to the management team who can lead that company to its next stage with minimum risk.

We also encounter situations in which family owners or founders are seeking capital for stakeholder liquidity and next-level growth while maintaining minority or majority ownership and operational involvement but have reservations or hesitation around traditional private equity or institutional investors.

And then there are the situations (as with OVS Equipment Solutions) where private equity firms want to divest locally headquartered companies that may no longer align with their strategy. From our perspective, that’s a great opportunity to re-establish local ownership—and we have a relationship network of high-net-worth individuals and family offices with flexible investment horizons to bring the right partners to the table alongside our team.

In contrast to independent sponsors and private equity funds who may run the same playbook on every transaction, Cascadia Private Capital constructs each transaction collaboratively and from the ground up:

We believe the CPC approach holds particular appeal for companies in mature, stable sectors, including but not limited to manufacturing, transportation & logistics, distribution, and oil & gas—companies that generate consistent cash flows across market cycles.

Businesses in these traditional sectors can often feel unloved in a more traditional M&A process. However, these companies can be well positioned to achieve attractive, accelerated growth with the right structure and group of investors who can bring domain expertise, strategic and operational insights, and have a similar long-term growth focus as the current ownership. That’s where deal magic can really happen!

We encourage any business owner who wants to assess a full range of options for their business to reach out—we are always quick to respond and eager to learn more.

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Price Checking the Market Can Help Company Owners Choose the Best Path

In January, we shared our thoughts on why and how 2021 could create the Perfect Storm to Consider a Sale for company owners. We projected peak valuations in the M&A and capital markets—married with elevated recovery, tax, and business cycle risk—would provide the impetus for many to consider their strategic alternatives.

Having lived through a period of significant market turbulence, many business owners became acutely aware of how much risk they were shouldering, which opened their eyes and minds to a transaction. Midway through 2021, our thesis has borne out, translating into an M&A and capital formation boom with further room to run.

Our team has had the privilege of supporting 35 clients in M&A and capital raising efforts over the last 12 months. One might naturally attribute any year-over-year growth in 2021 to the pandemic’s temporary pause on dealmaking in 2020, but this year’s unique drivers have made it an even more active year than 2019.

 

Select Client Spotlights

Click through the links below to learn more about a selected grouping of the clients our team has supported in the last year. To see all of our recent transactions, click here.

White Hot Valuations for Growing Companies in Select Industries

Transaction multiples for many companies across our core growth sub-vertical coverage areas have increased materially relative to the pre-COVID environment. In many sectors, value appreciation of 20-30% is common. In some cases, it is even more elevated, especially in emerging growth sectors where first-to-market advantages and intellectual property protection are exceedingly valuable.

Companies that fared well through the pandemic and exceed the quality bar for a critical mass of counterparties are among an elite group, and the laws of supply and demand have taken hold. Private equity investors, sitting on $1.9 trillion [1] of uninvested capital, have been aggressive in attempting to outbid strategic buyers, who are often too constrained to quickly react to shifting market forces. After a pause to focus on internal operations, strategics also broadly reignited M&A efforts this spring, and the S&P 500 has $2.7 trillion [2] of cash on balance sheets.

Investors have always had robust interest in strongly performing businesses, but growth, specifically profitable growth, is even more valuable and sought-after now than it was before the pandemic. The relative value of growth has increased significantly in a market where the tide is not lifting all boats equally. Those with a compelling narrative and supporting financial performance are best positioned to maximize value in 2021.

The Tax Change Window of Opportunity

We’ve previously shared how business owners might quantify the potential tax dollars at stake in evaluating the timing of an M&A transaction this year.

Efforts to drive capital gains higher by the Democratic party have been persistent since the Obama Administration, but success has been elusive. However, all signs point toward change under the Biden administration, and many states are enacting their own forms of capital gain taxation, creating a second layer of potential burden. It is worth noting that there is no history of retroactive implementation of capital gains increases.

While the final rate of increase at the federal level may or may not be as high as the proposed 39.7%, the tax risk has not been higher in recent history, and the incremental dollars at risk have not been this elevated since the 1950s.

While this is likely not the only decision-driver for company owners, it should be on the minds of every owner as a material consideration in timing a potential transaction, given that any new paradigm is likely to persist for the next four years.

No Guesswork Required: Peace of Mind in a Market Check

In our conversations with company owners, we often hear some version of this sentence: “I hear valuations in my industry are at an all-time high and taxes may increase significantly, but what does that mean for me?”

If an owner is on the fence, how can they gauge the potential opportunity before them and determine whether this is the year? We recommend making these decisions with data, which is the basis for a ~15-30-day process we call a “Market Check.”

After some initial discovery with an owner, our team can prepare a limited scope of information to share with a thoughtfully selected group of potential buyers or investors. This surgical strike gathers real-time data to help company owners understand actual interest levels and gain more clarity around current valuation. Knowing that investors would value your company at $180m instead of $150m provides the inputs needed to evaluate the alternative option of waiting until you’ve achieved additional organic growth.

Our team conducts these checks for owners without the expectation that the owner moves forward with a transaction. This check is simply our way of helping you collect the appropriate data to inform your decision-making. Ultimately, this leads to a decision in which you can feel completely confident, even if that decision is to keep working away at your business without transacting for many years—or at all!

How Much Time is on the Clock?

There is still time to complete a transaction this year if you get the ball rolling imminently. If you are committed to closing a transaction in 2021, we would suggest you begin the process by the end of June to ensure a higher probability of closing by year-end and avoid unnecessary tax risk.

While this year’s boom has created conditions for peak valuations and a window of opportunity on the tax front, it has also caused congestion in the M&A service provider system. We’ve recently been hearing from deal lawyers and Quality of Earnings providers that they are reaching capacity for the year or are raising their rates due to supply and demand imbalances. Waiting until Q3 to begin might leave you in a service provider bind without the appropriate resources to complete the transaction.

Which Verticals are Enjoying Post-COVID Peak Valuations?

The Cascadia team has long held deep expertise and transaction experience in niche segments across a variety of industries. This focus allows us to provide the most innovative and expertise-driven service for our clients. It also enables us to align the right individuals within our networks across industries of shared focus.

In response to the changes in the market, we have doubled down on our focus on growth, and each banker has identified the most attractive sub-verticals within their industries—those experiencing high transaction activity levels and peak valuations. To see which sub-verticals our bankers have highlighted as growth areas, click here.

Learn How These Dynamics Apply to You

Our team is here to answer any questions you may have about your capital raising and M&A alternatives, whether you’re a Cascadia client or not. You can find our contact information here.


[1] Preqin (As of 5/2/2021). Retrieved from https://pro.preqin.com/
[2] Bloomberg: https://www.bloomberg.com/opinion/articles/2021-05-04/corporate-cash-grab-flashes-warning-for-bond-investors

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SPACs offer public market access to high-growth private companies

Most private business owners with an eye toward raising capital know that over the last year, Special Purpose Acquisition Companies (SPACs) have exploded into the forefront. The SPAC structure—often seen now as the preferred path to the public markets for private companies with a fitting story—has significant benefits like price certainty, full values, speed, and relative ease of transaction.

Also known as “blank check companies,” the SPAC sponsors raise a blind pool of funds from private investors with the intent of using the proceeds of the IPO to acquire a company in a specific industry or sector and taking it public. The SPAC structure has existed for decades, but conditions over the last few years have conspired to drive a new surge in interest that has been referred to as a “Blank Check Boom.” There has been a pronounced sentiment shift toward SPACs as a viable path to the public markets. There is broad consensus that the product’s durability is apparent and sustainable.

SPACs can be an appealing route to the public markets for companies that prioritize valuation certainty, coupled with speed and relative ease of transaction closure, which are absent from the traditional IPO process. Because SPACs are mergers rather than public listings, companies merging with SPACs are also allowed (for now) to disclose the sort of earnings projections that are barred by securities regulators in traditional IPOs. This forward guidance emboldens the institutional investors—those in the PIPE (Private Investment in Public Equities) as well as the SPAC IPO investors—to believe in the inherent value of the business that may not otherwise be evident from the historical financial profile.

Investors in the SPAC IPO are placing a bet that the SPAC sponsor will find an appealing merger target at an attractive valuation. It is a relatively low-risk investment, as 100% of the IPO proceeds are held in trust and are fully redeemable at any time up to the de-SPAC merger vote. If the investors do not like the deal the SPAC sponsor and target company ultimately agree to, they can redeem their shares in full, plus interest. In almost all cases, these investors are making their redemption decision alongside a PIPE investment completed to bring further capital at a stated value at the time of the de-SPAC transaction. This validation/authentication of the deal by new, often fundamental (long-term and non-momentum driven) investors is becoming increasingly critical in driving deal volume.

De-frothing the Market?

The Securities & Exchange Commission (SEC) is considering new guidance to dampen and regulate the growth projections SPAC target companies can provide to SPAC IPO and PIPE investors. The new regulations under consideration follow April 2021 SEC guidance querying the appropriate accounting treatment of warrants issued by SPACs to the IPO investors. Their concern is whether certain warrants should be treated as liabilities (and not equity instruments) for accounting and reporting purposes. The SEC’s evaluation of these considerations has caused a significant pause in market activity. Only a few accounting and law firms dominate the SPAC market, and their bandwidth to address the issue by changing the financial statements to meet new and evolving SEC guidance is highly constrained.

Those moves have cut into some of the frothiness the SPAC market experienced over the fall and winter of 2020—when every day seemed to bring a new announcement that some celebrity or other was launching a SPAC, and many SPACs were well oversubscribed at the time of their IPOs. April was by far the slowest month for new issuances this year, and SPAC share performance is trailing the S&P 500 year-to-date. It seems retail investors have taken the brunt of the losses, and the financial traders (hedge funds) are largely leaving the PIPE market. The capital market landscape for SPACs is rapidly evolving.

Despite this relative pause in the SPAC market, we view the SEC’s moves as a net positive over the long term. Closer scrutiny shows the SEC takes SPACs seriously—and it may pave the way for a more mature long-term market growth period. We anticipate the window for new SPAC IPOs will re-open in the coming months, as investors digest the impact of the SEC’s changes and adjust expectations accordingly. New and evolving fundamental investors are coming into the PIPE market (replacing the hedge funds that were in it largely for the financial trade), which is a very good sign for the viability of the de-SPAC target company as it exists into the future as a public company.

Robotics, Automation, and AI: A Particular SPAC Focus

Cascadia’s Robotics, Automation, and AI (RAAI) group advises private business owners in these high-growth sectors, which enjoy significant interest from would-be SPAC acquirers. Several recent SPAC transactions are evidence of the robust investor appetite for innovative RAAI companies, and good examples for business owners considering this path to understand.

In February, Massachusetts-based Berkshire Grey—a maker of robotics and automation solutions for retailers, eCommerce, and grocery warehouses—announced that Revolution Acceleration Acquisition Corp. was targeting it for a SPAC merger that could value the business at up to $2.7 billion.

Other recent SPAC activity in the space has targeted remote-surgery pioneer Vicarious Surgical and exoskeleton manufacturer Sarcos. We believe this sector, which is rapidly growing and has relatively high capital requirements, is very well suited for the SPAC product. We expect to see increasing activity in RAAI SPAC transactions.

A Ticking Clock

For business owners curious about the SPAC deal dynamics and structure, or the viability/suitability of selling their company to a SPAC, our team at Cascadia Capital has put together some key points to consider.

It is important to know that SPACs operate on a tight timeline—once a SPAC IPO is raised, it typically has two years to complete an acquisition (the de-SPAC transaction). SPAC shareholders may vote to extend the acquisition window, and shareholders also get final approval over the de-SPAC.

The ticking clock tends to drive an accelerated process once a SPAC identifies a target company. A typical timeline for negotiation, approval, and closing of a de-SPAC is three to six months.

During that time, negotiations and due diligence typically take four to six weeks and involve all the business, financial, and legal due diligence that is routine in any M&A transaction.

With most/all de-SPAC deals, there is an additional capital raise event via a PIPE transaction. This fundraising effort typically involves collaborative work between a SPAC sponsor and the target company’s management team in their interactions with the PIPE investors.

The remainder of the time to close—anywhere from 12 to 24 weeks—is required to complete and file the appropriate proxy/registration/disclosure statements with the SEC and prepare the company to operate under public company disclosure requirements.

Given the tight timetables involved, there are a handful of critical considerations we believe private company owners should keep top of mind.

Reporting Readiness

While the public reporting requirements are lighter for a company participating in a de-SPAC than one pursuing the traditional IPO track, they are still significant. Complying with them is a major effort in the months leading up to the close.

More to Know, More to Come

For more in-depth background on SPACs, we highly recommend this FAQ-style deep dive into the topic prepared by our friends at Perkins Coie.

While much of the recent mainstream media coverage of SPACs has focused on some of the more hype- and celebrity-driven aspects of the surge, we are long-term believers in the structure. The boom that started in 2020 has revealed significant public market demand for investor access to companies that have high-growth potential but lack the infrastructure or wherewithal to run the risky gauntlet of an IPO. We believe a de-frothed SPAC market is here to stay.

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What’s Now?

The demand for the West Coast’s maritime fleet was increasing moderately prior to the dramatic market changes caused by COVID-19. We envision the market slowly returning to a new normal over the next two years, albeit with some significant structural changes. We expect there will be more demand for domestically produced goods, reducing the need for some imported products. The market for petroleum tankers should begin to stabilize as market volatility decreases—in times of wild market swings, floating storage is one of the only ways to deal with supply imbalances.

The supply side of the broader marine fleet is challenged in two big ways. First, the maritime industry is dealing with a shortage of dry dock and repair facilities, causing a backlog of service and repair needs. Portland-based Vigor recently shifted focus from servicing commercial fleets to the defense segment, further squeezing the capacity for the service of ships. We’re also seeing the aging of the fleet itself while maritime business owners are simultaneously nearing retirement age. We will soon reach the need for enormous reinvestment into the Alaskan Fishing Fleet.

What’s Next?

Companies are in need of additional sources of capital to upgrade their fleets or enable a business transition. This can come in the form of a full exit, or for companies that wish to remain closely held, a better capital structure with minority equity or debt. There is a sense in the industry that many owners are looking to exit or retire but aren’t aware of the full range of options available to them. For many, their entire wealth is in their fleet or equipment, so this is a big concern. This generational shift also applies to the fishing fleet as owners and fleets are aging there as well. There is a great opportunity to engage with these owners to educate them on their options and help them find the solutions they need to best address their liquidity concerns.

What’s Your Why?

One of the main things that excites us about Cascadia is that we focus on family-owned and entrepreneur-backed companies. The impact that we can have for an owner is rewarding. We see how companies and the people they support can benefit from our advice and guidance.


About the Authors

Erik Einwalter, Managing Director

Erik provides leadership of Cascadia Capital’s Seafood industry coverage, with additional coverage throughout the consumer landscape. Throughout his career, he has completed over 40 transactions with over $2.0B in total value. Prior to Cascadia Capital, Erik worked at Salem Partners in Los Angeles where he delivered sell-side, equity placement, and valuation services to clients across numerous industries. Read Erik’s full bio here.

Jamie Boyd, Managing Director

Jamie has been a managing director and investment banker at Cascadia Capital for over fifteen years. He founded and co-leads the firm’s Energy & Applied Technologies practice, in addition to the firm’s Real Estate investment banking practice. Prior to joining Cascadia, he was a lawyer practicing corporate securities and M&A law. He has extensive experience working with family and institutional shareholders solving complex problems with innovative advice and has particular expertise in cross border transactions. Read Jamie’s full bio here.

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What’s Now?

While historically separated, the universe of consulting/tech firms and marketing/creative firms is converging, and the world of potential buyers has opened up significantly. More tech-focused firms are seeing interest from acquisitive marketing and ad agencies, and vice versa, creative shops are being bought by tech firms. These larger firms are all looking to make strategic bets to offer a full scope of integrated services for their clients (strategy, technology, marketing, design), which created a seller’s market like we’ve not previously seen.

What’s Next?

Prior to COVID-19, 2020 was set to be a historically strong market to sell a business services company already at scale. Post-COVID, many buyers will sit on the sidelines to see how business models weather the storm. Recurring revenue and remote working models should fare best, as well as anything tied to mission-critical IT budgets.

If you’re a growing company, you still need to think about specialization—going deep in one or two areas instead of going broad in six or eight areas. This will be difficult in a post-COVID environment where you have to balance this longer-term strategy of specialization with the short-term temptation to say “yes” to any and all revenue.

We’ll see the big buyers continue to dip down market below $25m in revenue and look at companies in the $10m-$15m revenue range, but only for companies that are very specialized in one area. Valuations post-COVID are still somewhat of an unknown, but those who weather the current economic storm without a decline in revenue will show well.

What’s Your Why?

I love working with founders and entrepreneurs. The sale of their company is often one of the top two or three biggest events in their lives behind big personal or family milestones. It is meaningful being part of the team that guides them through such a significant life event.


About Hugh Campbell, Managing Director, Business Services & Technology

Hugh Campbell is a Managing Director and co-head of Cascadia’s Business Services practice, focusing on the rapidly evolving service-based economy. His focus areas include consulting, staffing, IT services, and marketing services. He has worked with a broad variety of family-owned and entrepreneur-owned companies across the U.S. and internationally. Read Hugh’s full bio here.

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What’s Now?

Consumers are increasingly interested in “better-for-you” beverages, moving away from drinks with high calories, alcohol, sugar, and gluten. This dynamic has led to strong growth in sparkling waters and beverages across the functional (non-alc) category. Similarly, in the alcohol segment, this trend has fueled growth in seltzers, low and no-alc beer, hard kombuchas, and wine spritzers. Large beverage suppliers are taking note and have made significant investments to enter these new categories through both in-house innovation and acquisition.

While the COVID-19 pandemic has benefited many beverage brands that are distributed in the grocery and e-commerce channels, most alcohol suppliers have been negatively impacted due to the extended shutdown of the on-premise channel (bars, restaurants, tasting rooms). The current environment has led to a near-term slowdown in transaction activity, but we do expect this to improve in the second half of 2020 as strategics re-focus on their investment and acquisition strategies and the pipeline builds for those needing capital or a strategic partner for their next phase of growth.

What’s Next?

The lines are blurring between beverage categories. Non-alcohol suppliers, who were traditionally focused on CSDs, are increasing investment in “better-for-you” categories, and many of the traditional beer suppliers, including AB-InBev and Molson Coors, are investing in new categories including non-alcohol, seltzers, wine, and other “near beer” segments.

From a supply chain perspective, co-manufacturers are increasing capacity for “better-for-you” products, and we have also seen purchases of struggling craft breweries by buyers looking to shift capacity to new products including hard kombucha, seltzers, and cannabis beverages. There is strong interest in the manufacturing and equipment sector from both strategic and private equity buyers, who see the upside to investing in the broader trends driving today’s beverage market, without having to rely upon the success of a single brand and pay the typically high revenue multiples associated with doing so.

What’s Your Why?

My best memories are often around a table, filled with laughs, my favorite people, and fantastic food and beverages. The ability to work with companies and brands that touch this experience in many different ways makes my job incredibly rewarding. Being focused across the beverage ecosystem, from the supply chain to the consumer, allows us to provide unique insights, nuanced guidance and superior advice which enables us to position our clients to find the best-suited partner and achieve outcomes that meet or exceed their expectations.

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Sustainability + Energy Transition + CleanTech M&A

Coming in Hot to 2021: Sustainability/CleanTech Investments/M&A in 2020

2020 proved to be a banner year for the thematic clean-energy and broader CleanTech industries. Indexes soared to new highs with a continued positive outlook, M&A was robust with attractive multiples driven by insatiable investor appetite.

Three key factors drove 2020’s deal activity:


Sector Spotlight: Energy Storage

The pandemic brought the broader economy to a halt, but the energy storage industry clearly didn't get the memo. Instead, developers made 2020 the biggest ever for battery installations in the U.S.

More capacity is going into homes than ever before, helping families make better use of rooftop solar investments and keeping the lights on during outages. Large-scale projects reached new heights with utilities across the country using batteries to solve numerous grid problems and planning far more into the near future.

Solar and wind development projects with collocated storage are also providing a compelling opportunity. Project backlog is at an all-time high, with gigawatts of storage coming online.


Looking Forward: Carbon Sequestration

Carbon capture and storage (CCS) is widely seen as a critical technology for reducing atmospheric emissions of carbon dioxide (CO2) from power plants and other large industrial facilities—major sources of greenhouse gas emissions linked to global climate change.

Global capacity for CCS is on track to total 116 Mtpa by the end of 2020, according to the report. This is a 33% year-on-year increase, and a 100%+ increase on 2017 levels [3]. Various market players are joining forces to complete large-scale CCS facilities and rapidly commercialize the technology.

Encouraging signals and financial backing by governments worldwide are expediting industry pace as novel and compelling technologies continue to emerge to meet growing calls for change. We see a lot of interesting dynamics evolving in the commercial and industrial categories, as well as in the large-scale end of the market.


Sector Spotlight: Industrial Internet of Things (IIoT)

Overall, IoT dealmaking remained strong in 2020, driven by a flurry of consolidation in the healthcare, transportation, manufacturing, and wireless sectors. The total value of IoT acquisitions rose to nearly $69bn from $8bn in 2019 [4].

M&A activity was concentrated in a handful of verticals as businesses sought to digitize. Spurred by the global health crisis, healthcare technology-related transactions led in volume, with 24 acquisitions totaling over $19bn, or 20% of all deals last year. Investors showed sustained enthusiasm for the transportation sector, with 13 transactions in commercial and consumer transportation totaling over $5.8bn [4].

Enterprises continue to face a variety of complex challenges. Digital technologies—like industry 4.0 and the industrial internet of things (IIoT)—offer huge potential in enabling the fast implementation of many novel, value-adding use cases. Early adopters of the technology have an advantage in effectively navigating turbulent waters.


A Closer Look: Supply Chain Management & IoT

Before the COVID-19 pandemic, many companies implemented a lean supply chain, which prioritized cost reduction and minimized global product inventory. The pandemic exposed vulnerabilities in the lean supply chain approach, forcing companies to increase local inventory levels and diversify their suppliers. Firms utilized IoT solutions to control supply chain events across various modes of transportation and multiple logistics hubs.


Sources:

[1] Pitchbook
[2] IHS Markit
[3] Global CCS Institute
[4] 451 Research

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Two of the wine industry’s leading premium producers—The Duckhorn Portfolio and Vintage Wine Estates (“VWE”)—have recently announced public offerings, a dynamic that is expected to continue to fuel an already robust M&A environment for the beverage industry in 2021 and beyond. The wine segment hasn’t seen a pure-play IPO since Crimson Wine Group in 2013.

Robust market dynamics and strong retail investor appetite have rewarded Duckhorn with a market cap of over $2 billion and it is expected VWE (which was recently acquired by a SPAC), will also garner a compelling public market valuation and an attractive currency to continue their acquisition strategy. Furthermore, these two producers' ability to tap the public markets will provide meaningful validation of the attractive return potential for private equity investors, who have historically been averse to investing in the wine industry.

COVID-19 turned many wine producers’ sales channels upside down in 2020, with the decline in on-premise sales hitting small and mid-tier producers especially hard. In tandem, wildfires (and the associated smoke taint) damaged or devastated vineyards, production facilities, and properties across California and Oregon. Despite these challenges, and now with the gradual rollout of the COVID vaccine shining a light toward the end of the tunnel, the market is well-positioned for a significant rebound in M&A activity as earnings improve and buyer appetite increases.

The long-awaited completion of the Gallo/Constellation transaction may also signal a return to the M&A market for two of the industry’s largest suppliers, and both VWE and Duckhorn have cited M&A as a cornerstone of their future growth strategies.

Overall, the current public and private market dynamics create a compelling opportunity for small and mid-tier producers to consider M&A or an investment strategy to accelerate growth, find a strategic partner, or provide an opportunity to transition the business and obtain liquidity at an attractive valuation.

Public Filings Provide Window into Divergent Yet Successful Strategies

Vintage Wine Estates Acquired through SPAC Bespoke Capital

Special Purpose Acquisition Company, Bespoke Capital, announced the acquisition of VWE on Feb. 5, 2021 for a purchase price of $690 million, with an additional $50 million in future potential consideration. The acquisition provided VWE with a significant deleveraging event ahead of the anticipated public offering. “At some point, it takes a lot of capital to be in the wine business, and we needed more capital to continue our growth,” cited VWE CEO Pat Roney.

Notably, the SPAC that acquired VWE was initially raised to acquire cannabis brands. Given the turmoil in the cannabis market and the number of SPACS that had originally targeted the space, this could suggest that additional capital pools could turn their sights to beverage alcohol.

VWE has a track record of continuously and opportunistically acquiring and rolling up smaller brands, and has historically been a more value-driven buyer. In 2018, the company raised $75 million from leading agriculture-focused investment firm AGR Partners, which provided the company with a meaningful growth capital investment to continue to invest in building its portfolio to its current scale. We expect that with a public currency and deleveraged balance sheet, VWE will become an even more aggressive acquirer, becoming more competitive on higher-quality assets and brands of scale.

VWE has a broad portfolio across price points, varietals, and regions—spanning California, Washington, and Oregon. The company will likely continue to look at a wide array of assets that can leverage its value proposition, including sales and marketing infrastructure, supply chain synergies, and back-office support. The company’s infrastructure provides an attractive alternative for some smaller brands that want to focus on growing and winemaking instead of the commercial aspects of selling wine through wholesale and direct-to-consumer channels.

Duckhorn’s Focused Playbook May Expand Private Equity Interest in Wine

Duckhorn completed its $300 million IPO on March 18, 2021, issuing 20 million shares of common stock for an initial offering price of $15 a share, with shares soaring over 20% on the debut, translating to a market cap of over $2 billion. The IPO provides TSG Consumer Partners—Duckhorn’s majority owners who acquired the company in 2016 for approximately $600 million—with a compelling return.

With the IPO complete, Duckhorn will become a benchmark for how private equity investors can create meaningful value in the beverage alcohol category with a premium brand portfolio, laser-focused distribution strategy, and strong management team. Historically, the wine industry’s exposure to agriculture and the associated risks, as well as the significant working capital investment required to age inventory, have limited broader private equity interest. However, we believe that with both the VWE and Duckhorn transactions, we will see a significant increase in private equity and institutional investor interest.

Under TSG’s ownership, Duckhorn successfully executed on a growth plan to expand the portfolio to multiple brands and varietals while also staying true to the company’s core luxury strategy. Management has developed a best-in-class sales and marketing team that has successfully activated the portfolio across the retail, direct-to-consumer, and on-premise channels, and has had tremendous success growing its more moderately priced Decoy brand ($20-$35/bottle) in recent years, which has provided a “an incredible funnel for people to luxury wines,” said Duckhorn CEO Alex Ryan.

Duckhorn also completed two accretive acquisitions in recent years, including highly regarded Sonoma Pinot Noir producer Kosta Browne and Central Coast Pinot Noir producer Calera. Ryan told MarketWatch following the IPO, “Growth will continue to be internal,” but that the company would take a “very diligent and careful” approach to exploring acquisitions. “There are a lot of great wineries out there…maybe some will fit our culture and growth profile,” Ryan said.

In any such acquisitions, it is unlikely Duckhorn would stray too far from the luxury and ultra-luxury categories, likely looking for trophy assets of reasonable scale, varietals to round out its portfolio, or bringing Oregon assets into the fold to complement its existing Washington and California portfolio.

Savoring the Opportunities in 2021

With a robust public market environment and revenues for many beverage suppliers expected to rebound strongly this year with on-premise re-openings, we believe it is an opportune time for small and mid-size suppliers to consider M&A or an outside capital raise as a way to enhance supply chain and route-to-market capabilities and capture additional scale with a strong strategic or capital partner. Potential sellers evaluating the market should also consider possible capital gains tax increases looming in 2022. Attractive brands and cash-flowing assets will have the opportunity to achieve attractive valuations from investors during this unique period while capturing maximum proceeds from a tax perspective.

The Cascadia team has extensive industry experience and is in regular contact with investors and strategic buyers across the beverage industry. Please do not hesitate to reach out as you consider your M&A and capital-raising alternatives.

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As wind and solar energy become increasingly competitive against traditional methods of power generation, there is a burgeoning need for scaled energy storage—both in front of and behind the meter. As such, energy storage has become the darling of the renewable energy and cleantech worlds today, resulting in company valuations based almost entirely on expected future profits. Numerous notable M&A transactions embody these trends—including some advised by Cascadia in recent weeks.

Energy Storage Trends & Growth Drivers

Decreasing Costs of Renewable Energy

Over the past two decades, renewable energy has become more mainstream—in residential, commercial, industrial, and utility-scale contexts—and is becoming cost-competitive with traditional power generation. In some cases, advances in technology have made renewable energy less expensive than its conventional counterparts.

On the storage front, plummeting battery costs have stemmed from a global focus on the battery supply chain. This includes giga-factories producing lithium-ion batteries globally, driving down cost and increasing the efficacy of cells. This further increases the financial attractiveness and subsequent increase in deployments/use cases, driving the demand and growth cycle.

Transportation Electrification

The electrification of transportation is one of the biggest drivers of the movement toward renewable energy and is feeding demand for storage options. The electric vehicle (EV) market is the largest foreseeable market for batteries in the next 20 years , driven by consumer sentiment, mass adoption by automotive OEMs, and state and local governments' incentives. In fact, by 2030, EVs are expected to account for 30% of the global market share, with full price parity compared to ICM (Internal Combustion Motors).

Widespread Adoption of Stationary Energy Storage

Energy storage is expected to experience record growth in 2021, as annual installations will exceed 10 GW (gigawatts) in annual storage installations for the first time, increasing from 4.5 GW in 2020. The most significant contributors to this growth are the United States, mainland China, and Australia, which are predicted to contribute a combined 4.5 GW of the increase.

Behind-the-meter storage is also expected to increase as demand charge management, rate tariffs, and time-of-use arbitrage drive consumer choice in favor of renewable energy storage options. Favorable regulatory and incentive environments—both those currently existing and those anticipated under the Biden administration—further promote growth.

These trends are driving M&A and capital-raising opportunities for companies across the energy storage value chain. While the current momentum remains on opportunities in front of the meter—providing grid-scale storage for utilities and municipalities—there is also growth in both industrial and residential opportunities behind the meter.

Notable Deals in the Space

Valuations in energy storage are frothy across the industry, particularly relative to the nascency of the market. Investors are betting big on a macro level: assigning attractive valuations for companies that are currently losing money and are not expected to be profitable for five years or more. As renewable energy continues to mature as an industry, energy storage is clearly viewed as an inseparable component of that growth.

In a deal advised by Cascadia Capital, Powin Energy, a leading battery energy storage company serving the utility-scale market, received a growth equity infusion of more than $100M from Trilantic Capital Partners and Energy Impact Partners.

In late 2020, Fluence, a leading company in the grid-scale energy storage space, received a commitment from the Qatar Investment Authority for a $125M minority stake at a valuation above $1 billion.

Additionally, in late 2020, in a SPAC transaction, Stem, Inc. merged with Star Peak at a valuation of approximately $1.35 billion. Stem’s AI-driven smart grid technology helps support green forms of energy by charging during hours of low usage and providing backup when demand is high. The merger provides Stem an estimated $608 million in gross proceeds to invest in its emerging technology.

These three transactions represent capital flowing to leading companies in the energy storage space at very strong valuations.

Looking Ahead

The rapid expansion of the energy storage market is poised to be the most significant growth story in the larger energy value chain, impacting sub-verticals from utility-scale and C&I (commercial and industrial) to electric vehicles and consumer products. Energy storage companies looking to capture the massive M&A market opportunity will need to focus primarily on innovation, commercialization of products/services, and scale.

The current wave of large, utility-scale development will continue as grids build capacity. This wave is supported by more nuanced efforts behind the meter, largely driven by state regulation and subsidies for buildings and microgrids.

Energy storage companies are developing new battery technologies (anode, cathode, electrolyte, various chemistries) as well as other energy storage approaches (e.g. thermal, mechanical, kinetic, hydrogen, pumped hydro, etc.). The companies with the most deployments and well-established use cases will be most attractive to investors.

With a track record of deals in the energy storage industry, Cascadia’s expertise provides a lens through which to examine how these trends may impact your company’s M&A and capital-raising alternatives. Please do not hesitate to reach out to our team to discuss.

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Over our 21 years advising family businesses and entrepreneurs as they contemplate selling their business or raising capital, we have pursued the standard of providing balanced guidance and nuanced insight. Most often, our review of their options results in advising company owners to stay the course rather than pursue an immediate deal. We frequently counsel owners in favor of exploring a transaction down the road, given our belief in a more optimal valuation outcome once they can address key matters in their business and market.

However, within this backdrop, we now see peak valuations in the M&A and capital markets, married with the high degree and magnitude of tax risks with the single-party majority in government, resulting in our advising company owners that a near-term transaction may optimize both gross valuation and net after-tax proceeds. This environment has created the “perfect storm” to consider a sale in 2021.

Supply and Demand Dynamics Driving Valuations Above Pre-COVID Levels for the Right Companies

Many business owners have been heads-down navigating their companies through COVID-19 and 2020’s economic headwinds—perhaps unaware of the compelling valuations their companies can potentially achieve in the current market.

Meanwhile, the fundamental law of supply and demand has taken hold in this post-COVID environment. Similar to the dynamics in the public markets, shorter supply has driven relative M&A valuations for the right companies to peak levels, comparable to other high points in middle-market M&A back in 1999 and 2007. In our estimation, only about half of the nation’s middle-market companies have fared well through the COVID-19 pandemic and fit buyers’ quality bar, shrinking the number of options for strategic and private equity buyers. These dynamics have put the right companies in the perfect environment to maximize their value in 2021. Transaction multiples for many companies across our core growth sub-vertical coverage areas have increased materially relative to the pre-COVID environment, often by 20-30%, and sometimes by 50% or more.

On the buyer demand side, there is the perfect combination of intense interest from both private equity and strategic buyers alike. Quite often, we are seeing private equity firms outbid strategic buyers in our processes, especially when the private equity firm is making a strategic add-on acquisition for their portfolio company. The private equity capital piles are robust, with nearly $1.6 trillion of uninvested capital waiting in the wings. This is roughly 3x the prior 10-year low of $559B in 2012 [1].

Strategics who paused M&A activity to get their own houses in order in the early days of the pandemic are focused squarely on acquisitions of high-growth companies as a way to retain the momentum in their business performance and value. The S&P 500 has $1.9 trillion of cash on balance sheets, as compared to $750 billion back in 2008 [2]. In addition, those who took PPP loans can now deduct the loan amount used for business expenses from their tax bill, creating even more capital pools for M&A.

If your business is among the high-performing, you are poised to achieve compelling valuations in this M&A market. This dynamic is true for companies that experienced revenue and profitability improvements (on the right side of the scale—i.e., at least $50M value or higher) through the pandemic period—and who have reason to believe that growth will continue.

On the balanced perspective side, buyer interest has dramatically waned for companies in struggling sectors or those with any material issues such as heavy customer concentration, high reliance on commodity fluctuations, or low margins.

High Risk of Tax Increases Creates a “Window of Opportunity”

High valuations are only one part of the story for business owners in 2021. As a critical element of considering whether and when to pursue a transaction, our family business and entrepreneur clients are often equally focused on what their after-tax net proceeds will be.

Most business owners we have spoken with post-election believe strongly that there will be material increases in capital gains or corporate taxes—more likely in both—at both the state and federal levels. We are certainly not prognosticators, so we cannot in good faith opine on whether this will happen or to what degree taxes may increase if they do. That said, in our world of M&A, the mere existence of this risk, especially coupled with the nearly unprecedented materiality of incremental dollars at stake, is enough in itself to drive strong consideration—if not action.

It would not be prudent for a company owner to decide to sell their business based mainly on tax risk. However, we believe that any business owner who has already made the election to sell at some point in the next five years should strongly consider completing that transaction in 2021.

While we cannot know for certain the timing of any tax changes, Goldman Sachs indicated in a January 11, 2021 report that the risk is low of these changes being implemented before 2022 or being retroactively applied to 2021. This creates an important window of opportunity for company owners to consider action in 2021.

This combination of market dynamics—incredibly high valuations married with unprecedented tax risk—creates a core truth for business owners: 2021 is likely an optimal environment to pursue a sale.

For those company owners who agree that 2021 is their year, it is best not to delay. Doing so could introduce the risk of potentially not closing before the year ends. Back in 2012 (another material capital gains tax change year), we received many late-breaking calls from business owners in September, October, and even November and had to advise them that it was too late to close by December 31. Even last year, we received calls from business owners requesting to close by year-end through much of Q4, even as late as December 15. We again had to communicate that it was much too late to be assured of a year-end close. If you are committed to closing a transaction in 2021, we would suggest you begin a process by May, and certainly no later than June, to ensure a higher probability of closing by year-end and avoid unnecessary tax risk.

Quantifying the Risk for the Dollars at Stake

Today, Federal capital gains for individual taxpayers are generally taxed at 20% for long-term investments, and the Net Investment Income Tax rate of 3.8% can apply for a total Federal tax of 23.8% on the gains in a company sale. While we don’t know exactly what will happen in the next one to five years, we can make an educated guess that President Biden’s tax proposal will result in some level of a tax increase for high-income earners at some point during his initial term in office. With Democrats in control of Congress, that likelihood is even higher.

Business owners in Washington state have the additional consideration of the potential implementation of a new 9% state capital gains tax. Read more on that here.

It is impossible to predict the precise details of what will move from campaign rhetoric into law. However, the materiality of the tax risk should be on every business owner’s mind.

We had a discussion with our friends at Moss Adams to assist in quantifying the total gross dollars of potential risk. We outline below the insights that Partner and Director of Tax Technical, National Tax Andy Cates and Bob Hinton, partner in charge Seattle shared with us.

For a hypothetical $100 million deal, no matter where in the U.S. your company is based:

The tax risk change has probably never been greater in recent history, and the incremental dollars at risk have not been as high since the 1950s.

Advice Amid Ambiguity

2020 taught us many lessons, not least of which was the reminder to expect the unexpected. As 2021 has already produced many headline-grabbing days and tax uncertainty continues to impact the business environment, business owners need to ensure they have the right data to make appropriate near and long-term decisions for themselves and their stakeholders.

Whether or not you elect to pursue any transaction in earnest, we believe evaluating your current market valuation and analyzing net after-tax proceeds for 2021 versus future years is an important fiduciary duty as a company owner. Our team stands ready to answer any questions you may have about your capital raising and M&A alternatives. You can find our contact information here.


[1] Source: Prequin Q3 2020 Research Report
[2] Source: S&P Market Intelligence. S&P cash on balance sheet metric is Ex-Financial companies, and the 2008 average is $800B, but $750B in its lowest quarterly snapshot for that year.

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Cascadia has established itself as a market leader in the Robotics, Automation & AI (RAAI) sector hosting an annual conference, publishing thoughtful research, and sponsoring events nationally.
 
The Cascadia Connect RAAI 2023 conference was one of the premier events in the sector bringing together founders and investors from all over the world.
 
PBS was on site for this year’s event interviewing participants and put together this informative video that nicely summarizes the market opportunity in RAAI—it’s definitely worth a few minutes of your time if you want to get up to speed on the sector quickly.

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