What’s The Deal? | Unlocking the Power of People-Enabled Businesses Post-Pandemic


Evan: Hello, listeners and welcome to the What's The Deal Podcast. I'm today's host, Evan Junek from J.P. Morgan's Corporate Finance Advisory team, and I'm excited to be joined by Dana Weinstein, Head of Consumer Retail and Business Services Investment Banking here at J.P. Morgan. Dana, welcome to the podcast.

Dana: Thanks, Evan. Great to be here.

Evan: Well, Dana, let's start by getting to know you a little bit. Maybe you can talk a little bit about your career journey. How did you end up at J.P. Morgan in investment banking?

Dana: Well, it's definitely a long journey. I was a liberal arts major at Smith College and studied government and English. I started out in consulting thought I might go to law school. And then having worked on a couple of deals as a consultant, I realized that the investment bankers seemed to have a lot more fun than I was having. And so eventually migrated into banking as a career.

Evan: So were the bankers actually having more fun or was that just, (laughs) the grass was greener?

Dana: I think it was a (laughs) a little bit more perception than reality. But I've had a lot of fun actually.

Evan: (laughs) Good. Good. So you, you head consumer retail and business services. I think there is a tendency to focus on the consumer and retail side of that, but, let's actually focus more on the business services side of your coverage units tell me a little bit about what those firms do, and then what are the issues they're facing in the context of the current environment?

Dana: Well, Evan, I just wanna applaud you for focusing on business services

Evan:  (laughs)

Dana: I do feel that the consumer retail sector is absolutely front and center. You think about the Wall Street Journal and all the news that's come out recently and the state of the consumer is definitely a super important topic but one I feel is well-covered. On the other hand, business services, these are a little bit of the unsung heroes-

Evan: Mm-hmm.

Dana: ... in our economy. It spans everything from onsite services like janitorial or uniform rental to professional services like consulting, accounting firms, security firms, engineering. So it's a really wide, span of companies across almost every industry vertical.

Evan: So very interesting. So, obviously a lot of different things that those companies are doing. Are there sort of common themes? I'd say  immediately as you described those names, I can imagine a whole host of implications from, let's say, the pandemic and how these firms have evolved-

Evan: ... over the last few years. Can you talk a little bit about that?

Dana: Yeah, absolutely. I will say that when you think about some of the challenges that many companies are facing across every industry in services, these are generally  labor-intensive businesses.

Evan: Mm-hmm.

Dana: So these are really people businesses as opposed to tech enabled businesses, which means that some of the issues we've faced in the pandemic, which obviously we saw a decline in some services, coming out of COVID into the recovery period, the labor availability and cost of labor has been a real challenge-

Evan: Mm-hmm.

Dana: ... for really every sub-sector within services. So while the demand for some services has  certainly come back, the ability to actually service customers has been pretty tough through this market.

Evan: And as we think about your role as obviously investment banker, What are the kinds of steps that these companies are now taking to manage through those issues? I would think that consolidation would be one natural path where people could manage costs in some way or shape or form.

Evan: Can you give us more insights about that?

Dana: I think that's right. Consolidation is one way to kind of grow your talent pool and continue to upgrade talent in this kind of market. But I would also say the more technology solutions that they can bring to their business helps them,  grow more profitably, but also more quickly. You see companies who traditionally might have just used recruiters or internal recruiters now focus on AI and other technology tools to enhance their workforce.

Evan: And does that translate into, more substantial capital needs in the near term? Do you see more financing taking place? Is that a bigger focus for a lot of your clients, or is it more sort of just enhancing the day-to-day operations of the business?

Dana: Yeah, I think it's a little bit more the latter. It's not so much a capital cost or a real technology burden.

Evan: Mm-hmm.

Dana: But it's also a mindset shift.

Evan: Yeah.

Dana: So how do you continue to upgrade your talent pool? In some cases, how do you just get labor period when you're competing for talent across a lot of these industries? It's also about the culture of the organization, how do you retain your best people? So I think it's a mindset shift that goes beyond just the cost of acquiring talent, but it's also how do you nurture, how do you retain that may seem somewhat counterintuitive. You feel part of the fabric of the company you're more likely to stay, you're more likely to want to cultivate a team. And that really translates into a more profitable business over time.

Evan: So we're talking a little bit, how these firms have adapted to a different kind of environment, the challenges of the pandemic, you know? As you kind of shift your focus towards what's next-

Dana: Mm-hmm.

Evan: Talked a little bit about obviously the investment in technology, the shift in mindset, perhaps. What else do you see on the horizon in terms of key next steps for these companies, whether that be strategic in nature, operational or otherwise?

Dana: Given given the breadth of business services, it's sometimes hard to generalize.

Evan: Yeah.

Dana: So, as an example, one of the sectors that we cover in business services are live event services. So think about trade shows.

Evan: Mm-hmm.

Dana: Think about audio-visual services and hotels, which is a largely outsourced sector. Those are industries that were hard hit, as you would imagine during COVID, now have come back with a vengeance.

Evan: Mm-hmm. Mm-hmm.

Dana: It's virtually impossible to book a large event at a convention center.

Dana: There is so much demand to bring employees back together and to do presentations for clients, etc. Those are companies where they actually are looking for, and continue to look for other solutions and potentially to consolidate the industry-

Evan: Mm-hmm.

Dana: ... given just again, lack of talent and also the need to bring more digital solutions to their business. I would say there are other firms, let's talk about janitorial and other facility services where, scale matters and the opportunity to potentially consolidate some of the smaller players. That is pretty much a common theme across all of the services sectors that, that we cover. so M&A is absolutely top of mind for corporates. And then what I would say about the services sector, which is generally been the case for as long as I've covered the industry, which is way too long- (laughs)

Evan: (laughs)

Dana: ... is that private equity is a very-

Evan: Mm-hmm.

Dana: important, component of the sector and, very active in terms of investing in ultimately taking public and then selling services businesses. One of the obvious reasons is that these generally tend to be, as I mentioned, people-based businesses. So fairly CapEx light-

Evan: Mm-hmm.

Dana: ... businesses, high cash flow generators. And that tends to be very attractive to financial sponsors. So we're seeing a lot more interest coming out of COVID as these businesses are recovering.

Evan: Interesting. And do you see that being impacted at all by higher borrowing costs and interest rates, or do you see that being somewhat isolated from kind of the interest rate environment so far?

Dana: Yeah. Unfortunately not isolated from the interest rate or financing environment. I will say that I think transactions will happen.

Evan: Mm-hmm.

Dana: So we feel confident that the transaction activity will pick up. But certainly the market volatility and borrowing costs has impacted how aggressive we've seen private equity in some of these verticals. But based on at least year to date and what we've seen so far, I think the interest level is definitely there. It's really a question of, valuation and, bridging the gap between buyers and sellers.

Evan: In a lot of your anecdotes you've talked more about  Onsight services.

Dana: Mm-hmm.

Evan: How about the

Dana: Mm-hmm.

Evan: IT services, professional services? Do you see any different themes there? I would've thought that sector would've been maybe a little bit less impacted by the pandemic and maybe in some sense supercharged by the pandemic. Maybe in some rare cases where IT infrastructure, for instance became even more important at that time.

Dana: Yeah, you're spot on, Evan. I will say that the trend toward digital transformation and digital transformation consulting is top of mind for Fortune 500 companies now. How do they transform their own businesses to become more nimble and more competitive in this economy? So the firms that actually service those companies, so think the big four, think of other strategic consulting firms even the accounting firms, they all have had to keep up with the client demand-

Evan: Mm-hmm.

Dana: ..for services like that. And what we've seen in a lot more private equity interest in those sectors, which historically we'd seen, a few transactions here and there in terms of consulting services. But it was generally not, because these are people businesses, and often viewed as having kind of key producers.

Evan: Mm-hmm.

Dana: So I think a bit of a sentiment around, that they're risky investments for financial sponsors. That's really changed. So in this environment, professional services, the ability to invest in a platform and then continue to service the growing demand by corporates for true domain expertise from outside folks that continues to really, grow at a fever pitch. So it's a big part of what we've been looking at this in the last, six months to a year.

Evan: I would imagine through 2021 and maybe even early '22 timeframe,  a lot of smaller firms maybe looking to go public, trying to key players, those partners in these firms looking for liquidity options, exit opportunities, et cetera. Obviously with the state of the IPO markets, maybe a little bit less realistic at this point in time, it sounds like that sponsor opportunity maybe is the, the bridge to, monetization for some of these officers or maybe consolidation.

Dana: Absolutely. So, we've seen a wide range of structures. So everything from minority interest to, let's say, a former partnership that converts into a C-corp. We've seen, other examples where it's at an outright acquisition.

Evan: Mm-hmm.

Dana: We've sold some businesses to larger entities where they've maintained their culture and as separate subsidiaries.

Evan: Mm-hmm.

Dana: And again, really depends on the objectives of these parties. As you mentioned, sometimes it's really to monetize-

Evan: Yep.

Dana: ... some of the senior partners. Sometimes it's really to grow on the capital, to do M and A. So we've seen a, a number of catalysts along those lines.

Evan: Obviously we've talked a lot about consolidation. You know, the other direction is separation and focus.

Dana: Mm-hmm.

Evan: Is that, is that a theme that you see emerging more in this kind of environment?

Dana: Absolutely. I would say separation and a real focus on core competencies continues to be a really prominent theme across a number of services businesses. And that can come in a lot of different flavors. It could be enhanced investor relations communication around a subsidiary or a particular business, but it could include corporate carve-outs, which we're continuing to focus on in this environment. So it really spans a number of different structures and flavors. I think the idea of really getting value arbitrage from what's in on core business is also top of mind for a lot of CEOs. So, generally yes it is a theme, and I think it's one we're going to see continue. And, Evan, there's probably one last take away that I'd mention across all of the services, businesses we cover, which is really how resilient they've proven to be not just during Covid but post-Covid. So, in a world where there's still a lot of uncertainty, the services sector has continued to perform well.

Evan: Dana, such a pleasure to be talking to you today. Thanks for joining us on the podcast.

Dana: Great to be with you. Thanks.

Evan: Thanks so much.


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