2023年秋季通讯

FALL2023 Thoughts for theFinal Quarter From the CEO The macro economy has been moreresilient than expected with bright spotsincluding AI. As we start the final quarter of 2023, the macro economycontinues to improve slowly and has been much more resilientthis year than many expected. While a recession seemed likelyin the second half of last year, it has not materialized. Instead,specific industries—the construction, commercial real estate,and housing industries plus more recently the auto sector—have experienced rolling recessions. As banks have pulled back dramaticallyfrom lending, private credit funds haveproliferated to fill the void—a secularchange businesses cannot navigate alone. While there is some sluggishness and malaise in the economy,we are seeing pockets of brightness. The white-collar servicesindustry has been very robust, including IT staffing, digitaltransformation, cyber security, and other areas where highlypaid professionals are servicing corporate America. Certainareas of health care have continued to be strong, and thetransportation logistics sector—which has been in a downcycle—is now showing signs of strengthening. Deal activity has maintained pre-pandemiclevels with fairly good activity in the sub-$500 million segment. Private equity funds are narrowly focusingon sectors where they have deep expertiseand a competitive advantage. As buyer fear pervades in the marketplace,visibility into forward earnings is everything. While there is some sluggishness andmalaise in the economy, we are seeingpockets of brightness. are keen to learn about and adopt AI as part of their broaderautomation and robotics strategies. At this point, the marketperceives any management team that is not thinking about AI asfailing to do their jobs. As the Fourth Industrial Revolution powers forward, AI is givingthe economy a material boost as the tide that will eventually liftall boats. We think of it as a horizontal technology rather than avertical technology, much like the Internet was during its earlydays in the 1990s. While the hype may be slightly ahead of thereality of technologies right now, companies across industries Though the expectations of a surge in deal activity once theFed stopped raising rates has not come to fruition, marketsentiment is improving incrementally with a bit more appetite forrisk. At the same time, nervousness is still present, with many market participants shifting their wariness from interest rates tothe continuation of quantitative tightening, with the Fed pullingmoney out of the system. An upswing in sub-$1 billion deals Deal activity this year has maintained pre-COVID19 levels,which had been considered strong before the 2020 and 2021frenzy set an even higher bar. Drilling down, we are seeing fourdistinct segments of activity. The $10 billion-plus segment isslow, given the large leveraged loan activity required to supportit. We are seeing private credit funds step in to lend $5-6 billionto a deal and expect them to break the $10 billion loan barriersoon. The $1-10 billion segment is starting to reveal some greenshoots, with the age of founders driving family-owned businesssales and PE funds needing some exits. The $500 million to$1 billion segment is on the upswing, with deals getting doneand private equity (PE) funds stepping up and actively buying.With decent stock prices, strategic buyers have re-enteredthe market without the need to finance their deals and aremaking purchases to fill a geographic region or product type.In the under-$500 million segment, where we place our focusat Cascadia, activity is fairly good as buyers see stability inthe marketplace along with more attractive valuations withan increasing convergence among buyer and seller valueexpectations. Private credit filling the lending vacuum Against this backdrop, the market is starting to adapt to thenew reality of banks—whose hands are tied with new, morestringent regulations following the collapse of Silicon ValleyBank—pulling back dramatically from making loans. As a result,we have seen a massive rise in the private credit industry, withthousands of private funds, many of which are more than abillion dollars in size, being formed to replace banks in makingloans for deals. As a classic example of nature abhorring avacuum, the private credit sector has catapulted from morelimited and niche activity a few years ago to a large and fast-growing sector to fill the lending void left by the banks. Three years ago, a company seeking aloan could have gone to 15 banks; today,they need to navigate upwards of threethousand funds in the private creditmarket in search of alternative pathwaysto traditional loans. Visibility, visibility, visibility Across segments, visibility into forward earnings is paramount.Valuations are still very healthy for businesses with hightransparency of future revenue and earnings, and a sustainablecompetitive advantage. A software company with a robustrecurring revenue mode