Carl Marks Advisors recently assembled a roundtable of its senior leaders – Managing Partners Keith Daniels, Evan Tomaskovic and Brian Williams – to look ahead to 2025 and discuss key trends that will drive the markets, affect businesses and influence decision-making over the next 12 months. The wide-ranging conversation covered the state of middle market businesses, the continued evolution of the lending environment projected restructuring activity, and market sectors that may warrant closer attention as the year progresses.
Let’s start by taking a look back at 2024 – how did the restructuring environment compare to what you expected when we spoke at this time last year?
Evan Tomaskovic:
The increase in restructuring activity we expected to see has taken longer to materialize. Many companies and lenders we speak with are still in assessment mode. For more senior lenders, they are often secured enough, so there may be less pressure to act and/or put new money to work. They have been able to sit tight and wait to find the right solution.
Brian Williams:
I agree with Evan. It’s been a bit slower than expected. From a private credit perspective, most of the deals they work on are covenant light, so you cannot push through restructurings easily. Credit funds also do not want to become known for aggressively taking the keys from owners because they run the risk of alienating private equity sponsors and losing access to deals.
Let’s talk about the economic environment a little more. How has a high inflation environment impacted the strategies of consumer businesses?
Keith Daniels:
We’ve seen consumers gravitate toward lower-priced store chains and products. Walmart’s grocery business has benefited from this significantly. On the other hand, drugstores are really under a lot of pressure right now. They’ve traditionally had higher prices for goods and relied on foot traffic from customers prioritizing convenience. Now, that rationale has shifted for many consumers as they prefer shopping online and places like Walmart that offer lower prices. Overall, companies with strong private-label offerings and competitive pricing are faring well.
Brian Williams:
Despite the recent rate cuts and moderating inflation levels, the changing consumer patterns and increased levels of consumer debt are obviously affecting higher-end foods, restaurants and grocery stores. Walmart’s share price is up 60% this year, and I think it’s a result of consumers trading down; they’re putting cheaper, non-label items in their basket. Any companies selling commodity items with a luxury price tag are getting less of the consumer’s mind and wallet.
Looking back at our conversation in 2023, you predicted that healthcare and certain consumer sectors would see an uptick in restructuring. Has this panned out as you expected?
Keith Daniels:
We have continued to see quite a bit of restructuring happening across the healthcare sector. We’ve also seen the impact of changing consumer spending habits, with higher-end consumer goods companies struggling, especially in the food and pet space, for example. I think some of those trends will continue, at least into the early part of 2025.
Evan Tomaskovic:
Though there has been steady restructuring activity in healthcare, we have seen less of an uptick in healthcare bankruptcies than expected. Part of this could be because there are political and optical implications for a healthcare company going bankrupt – both from the communities they serve and regulators. We’re also seeing that with the amount of capital available and the continued influx of private credit lenders, it’s getting harder and harder to enact true restructurings.
Brian Williams:
I think it’s the way of the world. The interrelationships in all the parts of the capital structure and the proliferation of competition for deals cause restructurings to be challenging. We’ve also seen changes in bankruptcy filings, with less activity in the Southern District of Texas, which formerly heard a large percentage of the large bankruptcy cases in the country.
What about the middle market deal environment? Should we expect 2025 to be a continuation of 2024, or are we likely to see more activity?
Evan Tomaskovic:
Overall, M&A activity across the market has been slow or flat year-over-year. But Carl Marks was very active on the healthy M&A side in 2024, in large part because we specialize in working with closely held family-owned businesses, where transactions are largely dictated by life events. We’re riding the crest of a wave where Baby Boomer business owners are starting to reach the age where they need to make a decision: pass the business down to their family or sell it. We expect these types of sales to continue to increase between now and 2030.
What’s more, to Brian’s point earlier, because of all the capital that’s out there, if you’re going to market now with a quality company, you’re attracting significantly more bidding than you would two to three years ago.
How do you expect the results of the 2024 elections to impact businesses?
Evan Tomaskovic:
It’s hard to predict what’s going to happen regarding trade and tariffs, which has been one of the biggest discussion points for many businesses. When President Trump first implemented tariffs, China devalued its currency to mitigate the increased costs on their companies. Until a more detailed plan on what the levels of tariffs will be and what sectors they will affect, it’s hard to predict with any certainty as to how businesses will be impacted.
Brian Williams:
Interest rates have been remarkably sticky. While there’s been some softening by the Fed, I don’t expect a continued reduction in rates. From a policy perspective, tariffs will be relevant, but there will be less dramatic change overall than people expect. One potential impact of the tariffs we could see from our clients is further on- and near-shoring, with companies moving manufacturing from China to countries less exposed to tariffs.
Keith Daniels:
I agree with Evan and Brian; a lot will depend on the nature of the tariffs that are implemented, but the impact, certainly in the CPG sector, will depend on the ability of companies to move their sourcing from China to lower-cost countries or here in the U.S. From a policy perspective another agency we are watching is the FDA. We have to see how it plays out, but any major shifts in enforcement or banning certain ingredients could impact farmers, supermarkets and CPG companies.
How would you summarize the year that just passed, and what are you looking forward to for the year ahead?
Evan Tomaskovic:
Carl Marks Advisors has had a great year, and we think 2025 will be big for us, too. There are a number of deals in our pipeline right now, and we potentially have a few more coming into the market early next year. As a firm, we will continue to stress our role as true strategic advisors across the spectrum of industry sectors. Our team can provide operational and financial assessments, offer strategic advice on what actions to take and support companies through to the end of every engagement, whether that be a recapitalization, finding the right partner to acquire or selling the business. Raising awareness around these capabilities – something that is pretty unique when you look at the industry – will continue to be top of our minds heading into 2025.
