Private Equity in Transition: Market Shifts, Growth Strategies & Fiscal Headwinds with Matt Wolf of Elliott Davis 5-27-25

Summary

Becker Private Equity & Business Podcast
Episode: Private Equity in Transition: Market Shifts, Growth Strategies & Fiscal Headwinds with Matt Wolf of Elliott Davis
Release Date: May 27, 2025

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Introduction

In this insightful episode of the Becker Private Equity & Business Podcast, host Scott Becker engages in a thought-provoking conversation with Matt Wolf, a distinguished leader at Elliott Davis. Matt brings his extensive expertise in private equity and healthcare, shedding light on the current transitions within the private equity landscape, market shifts, growth strategies, and the looming fiscal challenges. This episode delves deep into the evolving dynamics of private equity amidst global financial uncertainties and explores strategic adaptations necessary for sustained growth.

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1. Navigating Global Financial Uncertainty

Matt Wolf initiates the discussion by addressing the pervasive uncertainty in global financial markets. He highlights the critical role of treasury auctions and bond investors in assessing the fiscal health of governments, notably the United States. This scrutiny directly impacts interest rates and, consequently, the cost of capital.

Matt Wolf [01:20]: "The level of uncertainty in global financial markets as bond investors assess various governments, including the US's ability to pay for their obligations and what that's doing to interest rates and what that's doing to cost of capital."

This environment of uncertainty poses significant implications for private equity firms, influencing their investment strategies and operational decisions.

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2. Sustained High-Interest Rates and Their Implications

A central theme of the conversation is the expectation that interest rates will remain elevated for an extended period. Matt emphasizes that this trend is not unexpected but has profound effects on private equity operations.

Matt Wolf [01:45]: "Interest rates will remain higher for longer, which I don't think is news to many."

Higher interest rates increase the cost of capital, making leveraged acquisitions more expensive and challenging. This scenario forces private equity sponsors to reassess their strategies, particularly the viability of add-on acquisitions versus organic growth.

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3. Shift from Add-On Acquisitions to Organic Growth

Scott Becker builds on Matt's insights by observing a noticeable shift from add-on acquisitions to a premium on organic growth within the private equity sector.

Scott Becker [04:05]: "The era of add-ons will come back, but in the current moment it does seem that there's a bit of a softness on people driving everything towards add-ons for sure."

Matt concurs, noting that private equity firms are increasingly prioritizing de novo growth strategies over add-on acquisitions due to the higher costs and reduced margins associated with the latter in a high-interest-rate environment.

Matt Wolf [04:59]: "We're seeing that sort of debt discipline manifest itself... Changing the way... we look at deals, the way they underwrite deals."

This strategic pivot underscores a broader trend where firms aim for sustainable, organic expansion rather than leveraging debt-heavy acquisitions that may not yield proportional returns.

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4. Challenges in the Lower Middle Market and Founder-Owned Businesses

The discussion delves into specific market segments, particularly the lower middle market, where the demand for businesses is diminishing. Matt highlights the struggles faced by founder-owned businesses, especially those run by older generations looking to retire.

Matt Wolf [02:30]: "Lower middle market as the demand for some of these businesses, especially even founder-owned businesses reduces and that will continue to bring multiples down."

This decline in demand results in lower valuation multiples, posing challenges for business owners seeking exits and impacting the broader healthcare and senior care sectors due to shifting demographic trends.

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5. Fiscal Headwinds and the Growing Deficit

A significant portion of the conversation centers on the United States' escalating fiscal deficit and its long-term implications. Matt and Scott discuss the projections indicating the deficit soaring to $40 trillion, a figure unprecedented in recent history.

Matt Wolf [06:08]: "A 6% of GDP fiscal deficit in the US... What does that mean as we look down, down 5, 10, 20 years in the future?"

Scott reflects on the challenges of managing such a deficit, contemplating whether the economy can sustain growth to mitigate the deficit or if debt reduction measures would necessitate economic contractions.

Scott Becker [06:41]: "Nobody wants to do that because that could lead to a recession. What a fascinating situation."

The looming fiscal imbalance raises concerns about potential inflationary pressures and the sustainability of current economic policies, adding another layer of complexity for private equity firms planning for the future.

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6. Long-Term Outlook and Strategic Adaptations

Addressing the long-term prospects, Matt underscores the necessity for sustained economic growth to manage the fiscal deficit. He questions the sources of future growth and the strategies private equity firms must adopt to thrive in this challenging environment.

Matt Wolf [07:11]: "Where is the growth going to come from? What is the growth story?"

He emphasizes that without robust growth, the economic landscape could face persistent inflation, making strategic adaptations crucial for continued success in the private equity realm.

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7. Insights on Elliott Davis

As the conversation wraps up, Matt provides an overview of Elliott Davis, positioning it as a premier consulting, audit, and tax firm based in the Southeast with a national clientele. The firm specializes in serving core middle and lower middle market clients across various industries, offering nimble and expert support tailored to the evolving and challenging operational environment.

Matt Wolf [07:30]: "Elliot Davis is the premier consulting, audit tax firm based in the Southeast, serving clients nationally... helping grow businesses in our new evolving and challenging operating environment."

Matt's emphasis on Elliott Davis's collaborative approach with sponsors and operators underscores the firm's commitment to fostering growth and navigating the complexities of the current market landscape.

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Conclusion

This episode of the Becker Private Equity & Business Podcast provides a comprehensive analysis of the current transitions in the private equity sector, highlighting the interplay between global financial uncertainties, sustained high-interest rates, and strategic shifts towards organic growth. Matt Wolf's insights offer a nuanced understanding of the challenges and opportunities within the lower middle market and the broader economic implications of a growing fiscal deficit. As private equity firms navigate these turbulent times, the dialogue underscores the importance of strategic adaptation and sustainable growth to ensure resilience and success.

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For more insights and discussions on private equity and business strategies, subscribe to the Becker Private Equity & Business Podcast.

Transcript

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[Scott Becker]

This is Scott Becker with the Becker Private Equity and Business podcast. Today we're visiting with Matt Wolf. Matt is a brilliant leader at Elliot Davis. He watches the healthcare area closely and just a really gifted person. Matt, what do you watch currently? What's going on in the private equity and healthcare space? What are you watching?

[Matt Wolf]

A lot, I guess I'm not even sure exactly where to start. You know, like many people I started to watch treasury auctions and pay attention to those just I guess overall the, the level of uncertainty in global financial markets as bond investors assess various governments, including the US's ability to pay for their obligations and what that's doing to interest rates and what that's doing to cost of capital. And you know, I think for, for private equity what is really, and I think we'll have some interesting deal flow implications is you know, certainly interest rates will remain higher for longer, which I don't think is news to many. But you know, as we look into the actual what that means for the, the operation of these strategies, you know, I talked to more and more sponsors who are, are doing the math, doing the analysis and saying, you know, the, the, the add on game is, is less appealing. Certainly we'll do add ons when it, when it makes sense, maybe for a capability rather than a geography or something. But we're looking for de novo growth, right? And you know, I'm really watching what that means on the lower middle market as the demand for some of these businesses, especially even founder owned businesses reduces and that will continue to bring multiples down and that'll you know, I think that'll create challenges for, for folks looking to exit particular in the middle market, but particularly in the lower middle market. A lot of founder owned businesses, you know, Gen X older gen X baby boomers looking to retire from the business they built over 40 years, not getting the multiple they were looking to get. You know, might have implications on downstream health care, demographic trends and ability to spend for senior care, things like that. But you know, this, this global, that's going from 100,000ft down to 10,000ft. But you know, really looking at the interplay of the global financial uncertainty, what that means for rates in the US and how that's playing out in real time as sponsors evaluate, you know, add on acquisitions versus de novo. And this is going to have effects on the wealth transfer, the so called silver tsunami in the US and it's really, there's, there's a lot going on and it's a very, very interesting time I guess to be a private equity sponsor trying to navigate all of this.

[Scott Becker]

Right. I mean there's so many things there that you just started to unpack and they're fascinating. One is that the era of add ons, you know, what I've seen last several years is add ons have been just more and more challenging for more and more investors. Private equity funds as interest rates have been up, as people have been having a hard time making the margins on some of these add ons and so forth, it's led of course back to a premium on organic growth and it's also led to a premium. Companies that have been able to deliver organic growth because they look pretty good if they're not adding all this debt where so much this debt was added on without having consequent success with the add on. So I think your point on, of course the era of add ons will come back, but in the current moment it does seem that there's a bit of a softness on people driving everything towards add ons for sure.

[Matt Wolf]

Absolutely. And we're seeing that in the way that new platforms are financed. Right. I mean lower leverage, bigger equity checks not only because of more restrictive debt covenants, but a de novo growth strategy almost by definition, except for some industries. Right. Certain industries, certain sectors, de novo growth can still require huge capital up front, but for many industries it really doesn't. Right. It's a slower play of capital over time. You don't need to lever up as much. So we're seeing that sort of debt discipline manifest itself there too. So it's changing the way and I'm talking to bankers, the way they look at deals, the way they underwrite deals, the way they think about deals. It really is a fundamental change. And then, you know, everybody, that's sort of playing down from the big question of, you know, how sustainable is a 6% of GDP fiscal deficit in the US and what does that mean going forward, not, not just for this whole period, but for the next fund and the fund after that? What, what does that mean as we look down, down 5, 10, 20 years in the future?

[Scott Becker]

Yes, no, absolutely fascinating, quite frankly, that you see that they say the deficit will go to 40 trillion. Quite frankly, if it only went 4 trillion in the last decade, we'd probably view that as a win. That's what this tax bill projects. But it's hard to believe with the amount of growth we've had over the last several years that it would only go up that much. And again, ultimately we got to either have a great growth economy to take care of that or we got to start figuring a way to pay down that debt. And of course, nobody wants to do that because that could lead to a recession. What a fascinating situation.

[Matt Wolf]

That's exactly right. I mean, not only a recession, it's also politically unpopular to pay down the debt. And we've seen through history that a 6% fiscal deficit happens, but it doesn't often or maybe even ever or very rarely, I'll say happen when we're essentially at full employment. So, so where is the growth going to come from? What is the growth story? And you're right, either have to grow ourselves out of it or face inflation.

[Scott Becker]

Exactly. What a frightening situation. The, the era, the end of add ons and more. So much to unpack still in these tax bills and what's going on. Matt, I want to thank you again for joining us on the Becker Private Equity Business Podcast. Take a moment and tell us about Elliot Davis, please.

[Matt Wolf]

Happy to. Yeah. So Elliot Davis is the premier consulting, audit tax firm based in the Southeast, serving clients nationally based off of our industry expertise. It's a very, we're a very nimble firm, really aligned and focused on serving core middle market and lower middle market clients across a variety of industries. So excited to be here. It's a great firm, great people who really, really understand how to sit side by side with sponsors and operators and help grow businesses including in our new evolving and challenging operating environment.

[Scott Becker]

Thank you very, very much, Matt. Just congratulations to you and continue. Good luck. Thank you for joining us today on the Becker Private Equity and Business podcast. Thank you very very much.

[Matt Wolf]

Thank you. Scott.

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