Good morning, Hubsters. MK Flynn here with today’s Wire. Optimism is the name of the game. Despite bad economic news, a tighter loan environment and heightened scrutiny on the private equity industry from the federal government, PE pros continue to express faith in the model. For a close look at how one firm in the lower-middle market is managing to close deals this year at a healthy clip, I reached out to Jon Pressnell, a partner at Blue Point Capital Partners. The PE firm, which has offices in Cleveland, Charlotte, Seattle and Shanghai, backs companies that generate between $30 million and $300 million in revenue in the industrial, business services, consumer and value-added distribution industries. The firm is often the first outside provider of equity capital in a growing business. Blue Point has closed several deals this year. In August, the firm made a platform investment in Water Lilies Food, a Bayshore, New York, maker of frozen egg rolls, dumplings and other Asian-inspired cuisine. The firm invested alongside Peter Lee, second-generation family member and CEO, who retained a significant ownership position in the company. Lee’s family founded the business in 1995. This Spring, portfolio company Brimar made an add-on deal for Crowd Control Warehouse, a designer and distributor of barricades, belt barriers and traffic control devices; and another portfolio company, National OnDemand, acquired Unified Utility Alliance, a cable and fiber construction company. Here are some excerpts from my interview with Pressnell: How is Blue Point managing the gap in expectations between buyers and sellers? We have seen sellers who have value expectations that were likely set pre-covid, pre-Ukraine, pre-inflation. A few things we have done to bridge these potential gaps: Continued to invest in our value-add resources, including our integrated team across global supply chain, data and digital and human capital, as well as leverage our operating executive network, among others. We look for meaningful rollover equity from sellers and management with the goal being that they see the value we bring with our experience and capabilities and are encouraged by the value creation plan which helps bridge those gaps. What’s the impact of rising interest rates on deal valuations? Rising interest rates have a dampening effect on valuations, and the combination of rising rates, inflation and recessionary concerns seems to have made buyers more cautious around certain end-markets and business models, but for the size of companies where we typically play, we haven’t seen significant valuation reductions, especially for quality assets. For more, read my full interview here. Value creation. Rising interest rates may not mean lower returns on new deals. That’s what private equity investors said last week at the annual IPEM conference in Cannes, reported Private Equity International’s Adam Le. The industry appears to believe that muted returns will be temporary and that its ability to generate alpha in the long run is rooted in its ability to act as canny operators. Claire Chabrier, president of French private equity association France Invest and associate director at Amundi Private Equity Funds, told PEI that around two-thirds of returns in the French PE market are driven by value creation coming from sales and profitability growth in portfolio companies. “It’s not leverage, it’s not multiple increase, it’s really that companies are growing when they are backed by private equity investors,” Chabrier said. “Two-thirds of the value creation comes from all the day-to-day jobs we make in a company, helping them to transform, to grow, to build up.” For more, read Adam’s story here. Dear reader. PE Hub has launched a new reader survey, and we’d love to hear from you. Let us know how we’re doing. As always, you can reach out to me at [email protected]. And, if you haven’t already, now’s a good time to register for PE Hub Europe and editor Craig McGlashan’s daily Dealflow newsletter – the European version of the Wire. Today, Craig wrote about how the UK is ripe for take-private boom as sterling takes a pounding. Click here to sign up for PE Hub Europe. And finally, here’s wishing everyone a Happy Rosh Hashanah. L’Shana Tova, MK Read the full wire commentary on PE Hub ... | 