The stock market, the private capital markets and the mergers-and-acquisitions markets have all been suggesting a more vibrant economy is on the way and, last year, the economy began to catch up with them. By the fourth quarter of 2014, unemployment in the United States had fallen to 5.8 percent, making 2014 the best year for job gains since 1999. This improvement is a result of several factors, most notably low interest rates stimulating demand and companies feeling comfortable enough with the economy to begin hiring again.
Mergers and acquisitions, financings and IPO markets should remain healthy and deal activity should remain robust because we’re in a positive market cycle. Traditional up cycles last an average of 42 months; we are about 17 months into the current one. This year has been strong and will continue to be strong — a trend we expect will carry into 2016. While interest rates will likely go up in 2015, deal activity should not be adversely affected, barring an increase of 2 percent or more. An increase in the cost of debt capital of 2 to 3 percent will not greatly increase the price buyers can pay. What is much more important is the amount of debt a buyer can borrow. The price buyers can pay will only be affected if banks pull back and lend less money.
Furthermore, financial and strategic buyers are sitting on piles of cash that need to be put to work. Many private equity funds and corporate buyers essentially stopped buying or investing during the downturn and accumulated a significant amount of capital. Financial buyers flush with cash are in many cases offering valuations that often exceed those of strategic buyers, creating a limitless range of opportunities for sellers not seen before, thus creating a seller’s market.
The Pacific Northwest in particular has reached a tipping point. An ecosystem here of people, capital, products and services is driving continued growth. When the great recession of 2008 hit, it was tough, but there remained a level of activity and energy and enough critical mass in the region for us to weather the storm and emerge stronger. With a stronger ecosystem, we expect deal volume in the Pacific Northwest will surpass the record amount seen in 2014, while valuations remain at peak levels. The Northwest should continue to outperform the national economy for several reasons:
1. The Northwest has an established presence in sectors that are experiencing fast growth. These include areas such as aerospace, technology, agriculture and consumer products. Local world-class companies like Boeing, Starbucks, Amazon and Costco anchor each of these sectors.
2. The Northwest has a thriving ecosystem for startups. Many entrepreneurs are spinning out of the aforementioned companies and have capital to invest or are starting up companies themselves. Many of these companies, such as Avalara, Inrix, Apptio and Redfin, are on the cusp of IPOs themselves. Inevitably, as these companies become established, entrepreneurial employees will spin out and start more new companies.
3. The Northwest benefits from having a higher percentage of middle-market businesses owned by families than any other region of the country. As baby boomer family business owners reach the age of retirement, they are now being faced with generational transfer decisions. Many business owners are concluding that their children do not want to run the family business, and those owners are electing to sell — often to a private equity fund. The private equity funds today are focused on growing businesses and their investments in local companies will further stimulate economic activity in the region.
The real estate market is also a new bellwether here. During the past two to three years, it has surged to become one of the top markets in the country, alongside New York, San Francisco, Los Angeles and Chicago. There has also been a large influx of capital into the region, leading to numerous transactions.
Northwest companies are particularly well positioned to take advantage of changing patterns in private equity and M&A, and we see similar patterns in the corporate markets. Based on the activity we’re seeing and discussions with corporate and private equity buyers, 2015 is set to be an auspicious year for the Pacific Northwest and beyond.
Michael Butler is chairman and CEO of Seattle-based
Cascadia Capital. Reach him at firstname.lastname@example.org.