Total Business Magazine

Capstone Headwaters: Global Experts in Investment Banking

Stephen B. Lewis (Steve) is a Managing Director of Capstone Headwaters, where he is a member of the Debt Advisory team. Steve is a 30+ year veteran in the financial services industry with broad legal and business experience in financing transactions of all types, with particular expertise in the financing of cross-border transactions.

Capstone Headwaters is one of the largest and most active independent investment banking firms in the US. Headquartered in Boston and Denver, Capstone Headwaters has over 150 professionals across 19 offices in the US, UK and Brazil with a global reach that spans an additional 30 countries. The firm offers a fully integrated suite of corporate finance services, including merger and acquisition, debt and equity private placement, corporate restructuring, valuation and fairness opinion and financial advisory services. With 16 dedicated industry groups, Capstone Headwaters delivers sector-specific expertise through large, cross-functional teams on a global basis.


What is the current state of the M&A market in Chicago and North America? Is the majority of the activity domestic or is there a high proportion of foreign investment?

The current state of middle market M&A in the United States in 2018 has been and continues to be quite robust. Through Q3, more than 2,000 transactions have closed, totalling $289 billion in investments. If this pace continues, and it is predicted to do so, 2018 will likely see more than 2,700 deals with more than $385 billion invested. 2017 concluded with 2,265 deal completed at a volume of $374 billion.

This activity is driven by a combination of readily available credit from a variety of sources, an enormous amount of uninvested capital in the hands of both private equity and strategic buyers, and an ageing population of business owners looking for an exit or at least a partial monetisation of their life’s work. While the numbers presented above describe the number and dollar amount of deals done in the US, it says nothing about the buyers of those deals.

Global uncertainty and the strength of the US economy has caused many non-US domiciled buyers, particularly strategic buyers, to look to the US as a place for investment. While it is somewhat difficult to say with certainty what percentage of deals in 2018 were completed by non-US buyers because they often set up US subsidiary entities to be the actual buyers of the target, it is reasonable to assume that approximately 25% of middle market M&A transactions were completed directly or indirectly by non-US buyers.


What are the biggest hurdles to overcome when completing a transaction? Are there any challenges or complications that are commonly overlooked?

In today’s M&A marketplace, one of the biggest challenges is managing buyer and seller expectations. While this is not new, the gulf between what a seller believes his or her business is worth and what buyers are willing to pay has rarely been bigger than it is now, in my experience. Sellers read the financial press, attend industry trade shows and hear anecdotes from their business associates about how they were recently able to sell their business for a sky-high multiple of EBITDA, so they believe they should be able to do the same thing without ever thinking about whether or not the business that was sold for the very high multiple really is an apples-to-apples comparison to his/her business.

It is a very difficult conversation or series of conversations in which the favourable and not so favourable comparisons have to be made. The other challenge that exacerbates the buyer/seller expectation problem is the amount of money chasing deals. This can cause prices to be bid up in auction situations to nose-bleed levels, thus creating issues of whether or not adequate debt capital can be sourced to finance the transaction.


Are there any extra measures that need to be considered when handling a startup client rather than a veteran in their industry?

While we don’t really deal with start-up businesses as that is the VC space and not our area of expertise, we do deal with a lot of smaller businesses that are in a phase of dynamic growth that present their own set of challenges. When analysing a growth business, one has to dig deep to identify the growth drivers and then analyse the sustainability of that growth and what forces outside of the company’s control can either quash the growth or accelerate it. Clearly, advancements in technology are affecting virtually all industries and industry segments, so that element has been added to every banker’s checklist.

 Global uncertainty and the strength of the US economy has caused many non-US domiciled buyers, particularly strategic buyers, to look to the US as a place for investment.

Have you handled any notable or exciting clients and transactions recently that you could tell us about?

I am currently working on a deal in the business services space that has been growing at a CAGR of at least 30% for the last 5 years, with no end to that growth in sight, based on their pipeline and identified but unrealised opportunities. I am sourcing the financing for the buyer. The good news is the buyer is investing significant equity and the purchase multiple, while fully priced, is not absurd. The bad news is that the base case projections (base case meaning the most likely case) still look like the proverbial hockey stick if presented on a graph, so prospective lenders have been having a hard time buying into the story at first look. However, with the assistance of a very good management team, we have been able to demonstrate that the base case is likely very conservative.


In your opinion, what personal traits and skills are most important when working in the financial services industry?

There are several personal traits that I believe are very important in the financial services industry but are often overlooked. The first is what I will call “thinking outside the spreadsheet.” A lot of what can impact a business and effect its operations and value comes from non-financial stuff.

Societal events (strikes, protests against a company for what it makes outside a plant that prevents employees from getting to their jobs), non-financial supply chain issues (the ship carrying the container of goods for a very important customer runs aground; supplier of a mission-critical part has a plant fire and cannot fill an order) are but two examples of things that can seriously affect a business. Sometimes folks in the financial services industry fail to adequately take into account the social, political and macro-economic issues that may impact, now or in the future, the performance and opportunities of a particular business they are analysing.

The other trait I want to highlight is, in order to be successful in financial services, a person can’t afford to be one-dimensional. In the world of financial services, we are blessed with the opportunity to meet and try to help people who own or control companies in a wide variety of industries and service sectors. Lots of those folks don’t know a lot about M&A, but they know a lot about a ton of other things. In order to build relationships and gain their trust, one has to take the time and make the effort to learn about the business, for sure, but you also have to learn about the person, his or her interests, what drives them to do what they do the way they do it. Empathy for their issues and concerns, even if you disagree with them or think them inconsequential, goes a long way to building a “trusted advisor” relationship, the Holy Grail in the deal business.



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