2014 Faculty Perspective on Private Capital Market Trends

The past several quarters have been characterized by a slow, but consistent decrease in demand for growth capital. Fortunately, this trend appears to be turning around. This is particularly the case for small businesses which are poised for stronger growth in 2014. Medium-sized businesses, on the other hand, are likely to experience a similar year as 2013, with slow growth, if any, says Pepperdine University’s Dr. Craig Everett, an assistant professor of finance and director of ongoing research on small business financing through the Pepperdine Private Capital Markets Project. This is unfortunate for the jobs situation, because medium-sized businesses are the engine for white-collar employment growth. One factor contributing to this situation is continued uncertainty over health care costs and bottom-line impacts of the Affordable Care Act. We will continue to see increased consolidation in the middle-market with strong M&A deal flow, anticipates Everett. This will be driven in part by a continuation of the low cost of senior debt, which is borrowed money that a company must repay first if it goes out of business as well as the low cost of mezzanine debt. Mezzanine debt is frequently associated with acquisitions and buyouts, where it may be used to prioritize new owners ahead of existing owners in case of bankruptcy. These factors are resulting in business valuations continuing to be relatively high, which means 2014 will be a good year to sell a growing business, predicts Everett.