Leveraged Acquisitions Roundtable

Drinker Biddle’s Corporate and Securities Group recently hosted its 13th annual roundtable discussion, which took place at Gulph Mills Golf Club in King of Prussia, Pennsylvania. This year’s event sported a new name—“The Leveraged Acquisitions Roundtable”—and featured many round tables full of representatives of private equity sponsors, senior lenders, mezzanine lenders and investment bankers. These participants partook in a discussion with Drinker Biddle’s private equity, corporate finance, tax, data privacy, labor and other attorneys.

The roundtable discussion was preceded by remarks from Scott Paul, president of the Alliance for American Manufacturing (AAM). AAM is a nonprofit, nonpartisan partnership formed by certain leading manufacturers in the U.S. and United Steelworkers that strives to strengthen American manufacturing through job creation and smart public policies through its research, public education, advocacy, communications and coalition-building efforts. Mr. Paul discussed the inherent unpredictability in today’s political climate and the challenges facing the U.S.’s manufacturing sector, including automation and foreign competition. He talked about the need for stronger training and workforce preparation efforts. Mr. Paul expressed an optimism for the future of American manufacturing based on the resiliency of the American workforce and the long-term prospects of the country and our system of governance, even in the face of short-term political instability.

Following Mr. Paul’s remarks, there was an open discussion among the participants. Among other things, the discussion focused on staffing issues for manufacturing firms, representations and warranties insurance in M&A transactions, data privacy issues, the current market for debt finance, and recent changes in tax policy. Below are some highlights:

• The conversation began with a robust discussion around the issues facing manufacturing firms with respect to staffing. Participants highlighted the difficulty they face in hiring employees for certain positions, and Mr. Paul offered some potential solutions to such issues, including apprenticeship programs and employers’ adjustments to their expectations with respect to their workforce.
• Discussion then turned to the market for representations and warranties insurance in M&A transactions. Participants discussed the entry of smaller insurers into the market, a market traditionally reserved for a few larger and more-established insurers. Participants also discussed the willingness of insurers to pay out claims on policies and the prevalence of claims related to misrepresentations in financial statements of M&A targets.
• Participants discussed the rapidly changing data privacy regulatory environments in the U.S. and across the globe. Particular focus was paid to the new California Consumer Privacy Act and the challenges that law poses to those who store consumer information. Participants noted the heightened focus that insurers are giving to data privacy issues and the prevalence of cybersecurity-specific insurance policies.
• Discussion then turned to trends in the current market for debt financing. Participants discussed the continuing plethora of liquidity in the upper middle market (and for investment-grade credits) and recent tightening elsewhere in the middle market. Mention was made about the tightening of terms and more conservative structuring and a few recent and highly publicized failed syndication efforts.
• The discussion closed with a conversation around the impending changes in U.S. tax policy, including the limitation on interest deductions to be imposed after 2022. Participants commented that the business community is not yet focused on this issue but is aware of the coming changes. Participants also expect that the business community’s focus will shift to this and related tax issues closer to the implementation dates. Participants also discussed the recent trend of entities converting from pass-through status to C-corporation status, which has been driven by the lower top-line corporate tax rate implemented in 2018.

We will continue to monitor trends and developments in each of these areas. For more information on the matters discussed in this alert, please contact one of the lawyers listed below or your regular contact at Drinker Biddle.