Finding Opportunity in Uncertain Markets: Insights from Rick Kes of RSM 4-24-25

Summary

Becker Private Equity & Business Podcast

Host: Scott Becker
Guest: Rick Kess, RSM
Episode: Finding Opportunity in Uncertain Markets: Insights from Rick Kes of RSM
Release Date: April 24, 2025

Overview

In this insightful episode of the Becker Private Equity & Business Podcast, host Scott Becker engages in a compelling conversation with Rick Kess from RSM. The discussion centers around navigating the private equity landscape amidst market uncertainties, exploring both challenges and emerging opportunities. Rick shares his expert perspectives on the current state of the private equity deal and fundraising markets, sector-specific resilience, and the strategic role of private equity in enhancing portfolio stability.

Current State of the Private Equity Market

Rick Kess opens the dialogue by addressing recent concerns highlighted in a Wall Street Journal article, which portrays the private equity market as being in a precarious position due to trade wars and other economic headwinds.

Rick Kess [01:13]: "I do think that there are pieces of positivity out there when it comes to private equity... there's still money to be spent, there's still investors that want to get into new sectors or new markets."

Despite acknowledging the prevailing uncertainty, Rick emphasizes that such conditions also present unique opportunities for value creation. He points out that assets performing at high operational levels continue to attract investment, underscoring the importance for businesses to enhance efficiency and asset quality to remain attractive to potential investors.

Opportunities Amid Uncertainty

Scott Becker links Rick's observations to real-world deal-making activities, noting the enthusiasm among private equity funds to pursue mid-sized deals aimed at growing EBITDA even in challenging environments.

Scott Becker [03:18]: "There are some glimmers of hope out there and there are people wanting to put money to work... an insane amount of money to be put to work..."

Rick concurs, highlighting that while market uncertainty breeds anxiety, it simultaneously creates openings for strategic investments, particularly in sectors with lower demand elasticity such as healthcare services.

Rick Kess [04:03]: "Things that have relatively less demand elasticity, so things like healthcare services... there are areas of opportunity."

Sector-Specific Resilience: The Case of Med Spas

The conversation delves into the resilience of specific sectors, with Scott bringing up the med spa and plastic surgery industries, which some perceive as recession-resistant due to their status as discretionary spending items that individuals prioritize even during economic downturns.

Scott Becker [05:14]: "Is there a feel for that on recession resistancy or not?"

While Rick is cautiously optimistic, he admits a lack of detailed data on med spas but suggests that services commanding high premiums, like those in the med spa sector, may withstand severe recessions unless economic conditions deteriorate drastically.

Rick Kess [05:14]: "There are some fact patterns there that makes sense to me... it would take a pretty drastic recession to impact... desire to receive those services."

Private Equity's Role in Portfolio Stability

The discussion shifts to the strategic importance of private equity for institutional investors, particularly in providing stability amidst the volatility of public markets. Rick underscores the value proposition of private equity in offering long-term growth and minimizing portfolio volatility.

Rick Kess [06:36]: "Private equity group LPs... involved in private equity to try to minimize the volatility of the public markets."

Scott raises a critical point about the inherent illiquidity in private equity investments and the challenges in valuing private assets compared to publicly traded ones. He questions whether private equity can genuinely deliver the promised stability and growth during uncertain times.

Scott Becker [07:44]: "They're supposed to revalue all the time... it's very hard to judge as a private equity investor where your capital is really at compared to the public markets."

Rick responds by reinforcing the long-term value that private equity has historically provided and suggests that the current environment is an opportunity for private equity firms to demonstrate their ability to balance and enhance investment portfolios.

Rick Kess [08:30]: "Private equity has been telling limited partners for a long time... now is another way to show them that... this is an asset class that can help balance your portfolio in these relatively uncertain times."

Conclusion

As the episode wraps up, Scott reiterates the dual nature of the current market—marked by uncertainty and hesitation, yet brimming with latent deal-making potential. Rick's insights provide a nuanced understanding of how private equity can navigate and capitalize on these dynamics, reinforcing the sector's enduring relevance and adaptability.

Scott Becker [09:06]: "Rick, I want to thank you for joining us again... You're spectacular."

Rick expresses his gratitude, leaving listeners with a reaffirmed perspective on the resilience and strategic importance of private equity in today's volatile market landscape.

Key Takeaways

• Navigating Uncertainty: Market uncertainties, such as trade wars and regulatory changes, present both challenges and opportunities for private equity investors.
• Operational Excellence: High-performing assets with strong operational foundations remain attractive targets for investment, emphasizing the need for businesses to enhance efficiency and quality.
• Sector Resilience: Certain sectors, like healthcare and potentially med spas, may exhibit resilience against economic downturns due to their essential or premium nature.
• Portfolio Stability: Private equity plays a crucial role in providing long-term growth and stability to investment portfolios, especially amidst the volatility of public markets.
• Valuation Challenges: The illiquidity and infrequent revaluation of private equity assets pose challenges in assessing investment performance compared to publicly traded counterparts.

Notable Quotes

• Rick Kess [01:13]: "There's still money to be spent, there's still investors that want to get into new sectors or new markets."
• Scott Becker [03:18]: "There's an incredible amount of deals that are teed up to go to market and an insane amount of money to be put to work."
• Rick Kess [06:36]: "Private equity... involved in private equity to try to minimize the volatility of the public markets."
• Rick Kess [08:30]: "This is an asset class that can help balance your portfolio in these relatively uncertain times."

Final Thoughts

This episode offers valuable insights for private equity professionals, investors, and businesses looking to understand and leverage the dynamics of uncertain markets. Rick Kess's expertise sheds light on strategic approaches to deal-making, sector selection, and portfolio management, underscoring the enduring significance of private equity in fostering economic resilience and growth.

Transcript

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[Scott Becker]

Go to wix.com this is Scott Becker with the Becker Private Equity Podcast. We're thrilled today to be joined by one of our most listened to guests, Rick Kess from rsm. Rick, the private equity market. There's an article that kicks off in the Wall Street Journal today saying that it was in a challenging spot prior to the trade wars and tear offs. Now it feels like somebody going under the knife. Give us some good news. Tell us your thoughts on where the private equity deal market is going, the fundraising market. Tell us what you're seeing and give us something uplifting and inspiring. Notwithstanding the Wall Street Journal article, notwithstanding the markets today, give us some good news. Can we ask you to do that? Rick?

[Rick Kess]

Well, you know Scott, I would love to be able to just come on and talk about all the positivity that, that we're hopeful for. But I mean I, I do think that there are pieces of positivity out there when it comes to private equity. Obviously, you know, there are, there are headwinds against us. You know, I would say, you know, uncertainty is never good for any investor. It doesn't matter if you're private or public. But you know, if there's uncertainty in the market, it's, it's harder to predict what, what will come to together in the future. So, you know, it's, it's not unlikely that, you know, somebody would say that right now. You know, we, we've got a pretty high level of uncertainty of where the future will go, whether it be because of tariffs or other regulatory challenges that have come up in the recent kind of six to eight, eight weeks or so. So, you know, I do think there's a lot of uncertainty, but I think with that uncertainty there's opportunity to find value. I mean, I think, you know, we continue to work with our clients on becoming more and more efficient because, you know, and more and more in the direction of a higher quality asset because I do think there's still money to be spent, there's still investors that want to get into new sectors or new markets or new, what have you. So I think the Assets that seem to continue to have the ability and desirability to be traded are those that are operating at the highest level that they possibly can and that are, you know, considered a assets, so to speak. So that's really where we come to our clients at is, you know, if you have the desire to be traded in the, in the near future, you have to become as close to an a asset as you possibly can. Otherwise it's going to be somewhat challenging. But if you are any asset, you know, then you have the ability to kind of potentially be traded at some, at some point in the very near future.

[Scott Becker]

And I think it's so interesting because what you're saying coincides with some of the discussions we're having. I was just on a deal call where the private equity fund could not be any more excited about pursuing deals, especially mid sized deals, not large bet the farm deals, but midsize deals and trying to grow EBITDA in a tough environment and find ways to do so when it go organic's not easy. So I think, I think you're right. There are some glimmers of hope out there and there are people wanting to put money to work. There's, there's an incredible amount of deals that are teed up to go to market and an insane amount of money to be put to work and a little bit of caution out there as to getting those two sides to meet because of the uncertainty in the environment and everything else.

[Rick Kess]

Exactly. You know, and I think, you know, you got a lot of people with high levels of anxiety related to the uncertainty. But again, when there is uncertainty, the things that are as close to certain as possible, so things that have relatively less demand elasticity, so things like healthcare services, which obviously I spend a lot of time in, other things that maybe have a little less exact kind of impact related to other economic impacts. So I do think that there are areas of opportunity.

[Scott Becker]

Let me ask you a question there. I was on a podcast earlier today with somebody who's in the Med spa business and they were saying sort of med spa, plastic surgery, cash pay, but even so, feeling a little bit recession resistant because it's one of the luxuries and one of the things that people want to keep on spending money on regardless of the economic downturn unless it gets so bad. Like people want to do their eyes, they want to do this, they want to do that and they also, the med spa stuff is still very popular. Is there a feel for that on recession resistancy or not?

[Rick Kess]

You know, I don't know about Med Spa specifically, I don't spend enough time, you know, digging into the data behind Med Spa. I mean, conceptually, I think there are some fact patterns there that makes sense to me. I mean, I just, I know, you know, my social network of people, you know, I think a lot of people, you know, value that type of service at a pretty high premium. So I do think that there are some logic behind saying, you know, it would take a pretty drastic recession to impact, you know, some people's desire to receive those services. But again, I don't know the data specific to that to, to be able to really comment with too much granularity on that specific area.

[Scott Becker]

No, thank you. But your overall take is, look, it's a little bit, a lot of uncertainty in the ear, a lot of pauses going on. But notwithstanding the pauses, there's still a lot of pent up interest in doing deals. Because aside from everything else, there's a whole industry that's built around doing deals and investing and trying to sell and to buy and to resell and grow and so forth. So there's still a lot of, lot of pent up interest and just trying to find that, that spot where you could hit that, where, where you could, you know, find the right, where you could find agreement on pricing with a lot of uncertainty.

[Rick Kess]

Yeah. And I think, you know, a lot of private equity group LPs, you know, they're, they're, they're, some of them are, you know, large pension funds and other, other large, you know, institutional investors. And if you think about it from their perspective, they're involved in private equity to try to, you know, kind of minimize the volatility of the public markets? You know, public markets being so volatile, you know, it kind of makes you wonder like, is this the time for private equity to really show their value of bringing stability and long term growth to those limited partners by saying, you know, we're a little bit different. We're obviously been telling you we're different than the public markets, but this is our opportunity to prove it to you. And so I think that's another area that our private equity clients are really trying to focus on is how do they make sure that they're kind of consistently telling that story of value to their LPs, considering the relatively high levels of volatility that they're seeing in the public markets on their other parts of their investment portfolios.

[Scott Becker]

And just a question on that. Some of that is false comfort, some of that's real comfort. The private equity funds are supposed to revalue all the time. Yeah, every quarter and so forth. They're investors, but they're not real numbers because somebody's not, it's not been sold, assets have been sold. So in some ways it's very hard to judge as a private equity investor where your capital is really at compared to the public markets where you see it every day. And I guess there's at least some comfort in knowing that it's privately held, it's not being traded, it's not really being valued exactly every day. So at least you could breathe while you wait and hope, but it is illiquid and so you're sort of stuck to that extent. But no, I think your point is so well taken, Rick, is do they prove that, hey, this ends up being a good asset class in a time of uncertainty, you know, and how does that play through?

[Rick Kess]

Yeah, and I think that's, that's the message private equity has been been telling limited partners for a long time and I think, you know, for a large extent they've been able to prove out long term value. But now, now is another way to, to show them that, you know, this is an asset class that can help kind of balance your portfolio in these, you know, relatively uncertain times.

[Scott Becker]

Well, I tell you a lot of portfolios will be going under the knife this year. We'll keep on keeping an eye on it. Rick, I want to thank you for joining us again on the Becker Private Equity and Business podcast. You're spectacular. Rick Cass, rsm. Thank you very much.

[Rick Kess]

Thank you, Scott.

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