A young founder and principal of one of home building's greyhound type of private home building firms courts the intensely attentive favor of dozens of private equity, hedge fund, and other capital source representatives. He's looking at three scenarios:
- Raise debt and buy another company
- Raise equity by going public via an IPO
- Sell the company to a public home builder
As what everybody in the industry hopes is the end of "the 90-day pause" that wedged itself into what had been a delightful first-half of 2013, yet another specter emerges for a good number of high-volume home building community members.
Look again above at the options this young executive must choose among, probably sooner than later. Notice that not among those options is one that suggests he will remain status quo, a double-market privately-held home builder playing extremely well within his game and not taking on more risk than necessary.
Why is doing nothing not an option for so many privately-held companies right now?
It comes down to two little letters that mean everything: A&D.
The 2011-through-first-half 2013 surge kicked recovery machinery into gear, which meant good things momentarily, and then a struggle for businesses that had grown up on access to bank lenders acquisition and development loans.
To date, a few things have gone on that have electrified the market.
- Seven home building companies have gone public
- At least twice that number have accessed capital in the debt markets
- 10 or more private companies have sold to public or larger private firms
All the while, the world of private companies suddenly, unceremoniously divided sometime in the past 12 months, leaving two different types, albeit speaking from a capital structure standpoint.
Left toiling in the better-than-it-was-worse early recovery market were companies that have been able to access lines of new capital to buy and develop land, and there were those either could not or would not resort to that type of money, since it came with expensive strings attached.
So, what's happening now is that the lifeline of those privately held companies who didn't or couldn't strike a deal for access to capital--their legacy owned "good lots"--is winding to a close.
They're left, wringing their hands, wondering why it is traditional lenders haven't reengaged with them for A&D loans, and wondering whether they should use what's left in their dwindling coffers to spring for B-minus and C lots, because they're about all they can afford.
The other option, of course, is to raise their hand mighty soon and say to some public company CEO, "hey, I can be your division president in this market," and get bought.
Imbalances that are harsh for some are opportunities for others.
So, our young friend who founded and runs that greyhound company right now is literally counting down the days until he's got word on his deal to access debt, equity, or downright sell to a public.
Most important take-away for any player in this predicament right now? It sounds stupidly obvious, but it's not so easy to do.
Know exactly who you are; what you want; and what you do really well that can be done over and over flawlessly