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In a normal year, Steve Jacobs and his firm, BCC Advisers, close six to 10 mergers and acquisitions. But this isn’t a normal year, and that number has dropped to two closings and one in the works.

The problem in this economy isn’t lack of money. With an estimated “overhang” of $400 billion in private equity funds that have been raised but not spent in 2009, there are lots of people looking to buy, Jacobs and other financial managers say.

In other words, there are some large players willing and able to consume smaller or weaker companies that are having difficulty finding capital or working out distressed finances with their lenders.

“Private equity groups have a lot of capital, and strong companies with good balance sheets and a lot of capital are looking for strategic opportunities, but they are being very cautious because they are having to put more equity in the deal to make it work,” Jacobs said.

His comments echo those of other financial and business advisers who were interviewed recently by the Business Record.

The assignment from the big fish is to buy. Those looking to sell are just trying to preserve value, take their equity off the table and, as Eric Lohmeier, managing director of NCP Investment Banking, says, “just get on with their life.”

Here are the observations of three Greater Des Moines investment bankers.

Money’s out there

First National Investment Banking (FNIB), which established an office in Des Moines in June 2008, has seen a slowdown both in the number of merger-and-acquisition deals and in the pace at which private-equity investors are reviewing deals. However, the Omaha-based investment bank is seeing an uptick in recapitalization deals, said Paul McGarvey, managing director of FNIB’s First National Mergers & Acquisitions division, which is based in Des Moines.

Growth-recapitalization deals are among the most prevalent types of transactions that FNIB has handled over the past two years or so, said McGarvey.

Through a recapitalization, existing owners sell a majority stake in the business to a private-equity firm while maintaining day-to-day operational control of the company, said McGarvey, whose investment bank specializes in “lower middle market” companies ranging from $10 million to $250 million in annual revenues. The liquidated capital then provides new resources for pursuing either organic growth or acquisitions.

“Companies that can liquidate 70 to 85 percent of the business, or less, to a private equity firm, there’s money to be deployed,” he said. “Or even (in) growth-company equity, a minority-capital play (in which the private-equity firm secures less than a 51 percent stake), there’s availability of money out there.”

FNIB, along with its sister company First National Bank of Omaha, is owned by First National of Nebraska Inc., one of the 50 largest U.S. bank holding companies.

FNIB has continued to be active in the food and agribusiness markets, which have held up well despite the overall soft economy. Other active areas have been the consumer, industrial and manufacturing industries, where FNIB has targeted low-cost operators that are highly efficient in growth niches.

Though the recession has caused FNIB to follow the industry trend in reducing its investment banking staff, McGarvey sees opportunities ahead.

“Right now I’m keeping pretty busy; I’m looking at a lot of opportunities,” he said. “What I see on a go-forth basis for the next six months is positive.”

The market for equity capital is much more disciplined than it was just a couple of years ago, “not only from a lending perspective but also from a private-equity perspective,” McGarvey noted. “Transactions take longer to close, just because of the level of scrutiny imposed by lenders as well as private-equity folks.”

Companies that have strong management teams with a solid track record of growth and a compelling story to tell investors are the ones that are successfully accessing private equity, McGarvey said.

The growth capital available is typically in the form of “mezzanine debt,” which is a junior obligation in the company’s overall capital structure that’s less likely to be repaid in the event of default, or some type of minority equity stake, he said.

Regarding those types of instruments, “you have a pretty liquid market out there,” he said. “There is availability of capital out there for well-run, profitable and growing businesses.”

All together now

NCP Investment Banking is an 8-year-old Des Moines company that specializes in mergers and acquisitions of small to mid-market companies with values between $10 million and $100 million. Lohmeier said the majority of his assignments are to buy, with private equity making up the bulk of the purchase rather than relying on traditional bank financing with its current demands for up to 40 percent down payments on loans.

What excites Lohmeier in these “risk-averse” days is the potential for joint ventures between companies that are strong in their sectors – a successful manufacturer and a successful distributor, for example.

“They’ll see an opportunity – growth in infrastructure markets, for example – and decide to share the risk and the upside,” he said.

NCP is working on three joint ventures and raises the possibility with virtually all of its clients.

“It’s very rare in any of our core client relationships that we are not talking about or structuring joint ventures,” Lohmeier said. “I can say across the board, in almost everything we do, everything we touch, in two-thirds of those, we are talking about joint ventures.”

Lenders tend to hold up many merger and acquisition deals because they are hoping that even a modest economic recovery, as has been predicted for 2010, will restore some value to the loans they have made to companies that are acquisition targets but also present risky balance sheets.

The problem is that the recession has destroyed asset value, especially of companies in manufacturing, construction and commercial real estate. Lenders and owners want to preserve as much of their investment as possible. Buyers are looking for good prices.

“It’s the liquidity that will drive the outcome,” Lohmeier said. “Creditors’ demands that they get back whatever they loaned on this asset, it’s just a pipe dream. None of these things get resolved until they hit a market-clearing price.”

It is difficult to negotiate when lenders hope to get 95 percent of their value on a loan and buyers offer 50, he said.

At that point, “You’re done; you’re done negotiating,” he said.

And on the off chance that negotiations proceed from that point, “I can tell you it will close closer to the 50 than to the 95,” Lohmeier said. “And you can take that to the proverbial bank. It’s not like people are trying to screw the banks; it’s based on cash flow. It’s not based on appraisal value; it’s based on the cash flow it can generate. It’s as mathematical and as logical a process as there is.”

NCP also has turned its attention to restructuring companies in commercial real estate markets in Missouri, Colorado, California and Ohio.

“Before you can do anything (in that niche), there has to be an acceptance that there’s a problem and there’s going to be a loss,” Lohmeier said.

However, he is not convinced that Iowa lenders are ready to make that admission.

Sell now

The key for a successful business adviser is to be nimble, said Jacobs, president of BCC Advisers, which was founded in 1988 and specializes in mergers and acquisitions, workouts for financially troubled companies and other business consulting services.

Workouts make up a majority of BCC’s business, finding the key elements that will help a company survive, possibly under new management or management structures and resolving its debt problems.

The majority of Jacobs’ merger and acquisition assignments are to buy, he said. With billions of dollars in private equity available, there are plenty of buyers in the market.

“There are some tremendous opportunities out there right now if you have the capital and you have the management to be able to expand, take advantage of these opportunities and be able to run them and integrate them into your operation and your culture successfully,” he said. “The troubled companies are complicated because you are dealing with a lot of creditor issues, but there are a lot of really good opportunities out there if you are prepared to deal with them.”

BCC Advisers is representing buyers and sellers in manufacturing, packaging and retail sales. Manufacturing and distribution companies have fallen on tough times; companies in health care, education, agriculture and infrastructure are relatively strong, Jacobs said.

A merger or acquisition is the best alternative to liquidation for troubled companies, he said, noting that few buyers are interested in acquiring equipment or other assets that are heavily leveraged.

The triggers to a sale are distressed finances or aging owners who do not want to deal with an uncertain future, he said.

For companies anticipating a sale, BCC Advisers recommends a “fast-track” merger and acquisition, one that is completed before the company’s value bottoms out. A liquidation or bankruptcy would be a last resort, but still an option that owners need to leave on the table.

Under a fast-track merger and acquisition, at least some local ownership and jobs could be retained, and by completing the sale in a short period of time, stakeholders should be able to maximize their investment in the business.

Whether buying or selling, one thing is certain in this economy, Jacobs said: “Old business models don’t work in today’s environment.

“The legacy models, the stuff that worked in the 1960s through the 1990s, aren’t working so well. You have to be willing to work with the Internet, the global economy, source goods and services around the world, compete and know where your niche is rather than do things like you used to do on a shotgun basis.”