Key Takeaways
- David Andrews of Gryphon Investors accurately predicted a harsh private equity cycle in August 2022.
- Gryphon adapted its strategy, focusing on portfolio protection amid a 'perfect storm' of market factors.
- The current low liquidity cycle is unprecedented, now in its third year, exceeding GFC duration.
- Gryphon emphasizes transparency and strong communication with LPs for its upcoming Griffin 7 fundraise.
Deep Dive
- Andrews traced Gryphon's strategy back to 2014, focusing on recession-resistant businesses.
- The firm underwrote against exit multiple contractions due to competitive pressures and rising prices.
- By January 2019, Andrews identified 'EBITDA madness' or pro forma EBITDA inflation as a significant problem.
- A 'perfect storm' of unrealistic EBITDA projections and high prices contributed to market conditions.
- Interest rate hikes further compounded issues, making the financial math unsustainable.
- Delayed implementation of hedging strategies was identified as a key mistake, exacerbated by 'covenant-light' financings.
- Gryphon focuses on holding top-tier companies and selectively pursuing opportunities for sale.
- The firm successfully sold Shermco at 4.3x after a three-year turnaround, exceeding its marked valuation.
- This contrasts with 56-58% of middle market companies failing to sell in the last three years due to valuation disconnects.
- The guest expresses optimism for private equity market improvement by 2026.
- This outlook is attributed to stabilizing interest rates.
- Increased pressure on Limited Partners (LPs) to receive capital back is expected to drive more sales of quality assets.