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Frozen Deal Market Turns Frenzied as Election Approaches

Potential tax law changes are driving sellers of companies that have survived Covid-19 to find buyers in the middle market.

The frozen mergers & acquisitions market of just a few months ago has turned into a frenzy as sellers look to lock in capital gains before year-end. Company founders and CEOs are hedging their bets against any tax law changes, including the treatment of capital gains and carried interest, that could come in 2021 if former V.P. Joe Biden, the Democratic nominee, defeats President Trump in the November election. 

“It’s going to be a busy three months here before year-end,” said Art Penn, founder and managing partner of PennantPark Investment Advisers, which focuses exclusively on middle market lending. “It’s a combination of good asset values for sellers and concern about potential tax law changes next year if there’s a change in administration.”

Not all companies will get sold. Companies that have been hard hit by the quarantine and slowdown caused by Covid-19 likely won’t have buyers right now, even if their sector is expected to improve once the economy returns to normal. A lawyer involved in a number of M&A transactions that haven’t yet closed said there’s too much uncertainty about a potential vaccine, government aid, and companies’ future growth projections. “There’s a real unease about what will be permanently changed by the coronavirus,” she said. 

She said it might be the third or fourth quarter of 2021 before hard-hit companies can either find buyers or get access to much needed cash.

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Founders of thriving companies, though, are in a far different situation, according to Penn. “By definition, the winners through Covid are the ones that are potentially for sale,” the PennantPark founder said. “There still remains a lot of capital out there that wants to invest in good companies. Middle market buyout shops are busy selling and buying.”

Penn explained that sellers have a number of traditional options, such as private equity investors, large companies looking to do strategic deals, and if they’re large enough, going public. The bull market in special purpose acquisition companies (SPACs), a subset of the public markets, offers another route. 

“While traditional middle market companies are probably too small, you do hear about sellers doing SPAC-offs, a bake off for SPACs,” he said. “With all the capital raised by SPACs, sellers want to see what that world is willing to offer.”

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