Private Markets 360° | Episode 30: Adapting to Change: Tax Insights and Market Dynamics

View Full Transcript

Chris Sparenberg :

Welcome to Private Markets 360, where we delve deep into the world of private markets and bring you insights from industry leaders. Today we're excited to welcome two distinguished guests from Nate Collins, national Transaction Tax Advisory practice leader, and Jessica Wadd, principal and strategy and innovation segment leader in management consulting, specializing in transaction tax advisory services for buyers and sellers. Nate Collins has extensive experience in tax structuring and due diligence across global transactions. Jessica Wad has spent 15 years enhancing client growth and operational effectiveness through her expertise in strategy development and market research, working across various sectors and contributing to major publications. Nate and Jessica, we're so excited to have you on the show. Welcome. How are you both doing?

 

Jessica Wadd:

Well, thank you for having us.

 

Nate Collins:

Yeah, doing really well and excited to be here. Thank you.

 

Chris Sparenberg :

Very excited for this episode as well. Let's start things off with a bit of background. Could each of you share your professional journeys and what led you to your current roles at bdo?

 

Nate Collins :

Sure. This is Nate. Yeah, I'm a bit of a tax geek, I guess, I have to admit, but I like to think of myself as first and foremost a deal professional, just with a subject matter specialization in tax. And I started my career in a pretty traditional manner doing tax compliance, etc. But early on gravitated more towards special projects. And when I started working on deals as a junior professional, I found that to be the most interesting just from a technical standpoint, but just because deals are really exciting. And so that's sort of what took me down this path. And early on I moved to doing deals full time.

 

Nate Collins :

And of course I've really enjoyed it over the years.

 

Jessica Wadd :

And I think that BDO is probably just a home for geeks. So on the flip side, I'm a strategy geek. I love working with leaders to analyze the market they're living in, the markets they're considering, and figuring out what they want to do. I started my career working with Fortune 500 Global 1000 and over the last handful of years with BDO really started to sink my teeth into more of the private market world and both the large and the mid size private organizations where frankly, the questions and the challenges are pretty exciting and more multifaceted. There's just a lot going on and a lot to wrap your arms around.

 

Chris Sparenberg :

Also sounds like we have a new unofficial motto for bdo. The Home for Geeks.

 

Jocelyn Lewis:

All right, well, thank you both for sharing those insights into your career journeys and the unique perspectives that you bring to BDO also. So now that we have a sense of your backgrounds, let's shift gears and talk about what you're seeing in the market today. With private markets evolving rapidly, could you share some of the key themes that you're observing within the private markets investing now compared to six months ago, and what specific changes you're seeing, particularly regarding tax consequences that investors need to be mindful of?

 

Nate Collins:

Yeah, sure. I guess I can lead off with that one. If we think back six months, we were in April and while Q1 of 2025 was pretty strong, it sort of felt like the year that deal professionals were hoping to have was maybe going to play out. Things were going to be pretty strong, good, healthy volumes. Things really got complicated in April in a lot of ways came grinding to a halt. Like a lot of deals did go on pause for a period of time there and that was obviously impacted by tariffs and sort of what they layered onto just sort of global uncertainty. In a lot of ways that was already there anyway. But at that time we just saw such a significant slowdown and that sort of bled into on the US Side, pending tax legislation, which wasn't just US centric.

 

Nate Collins:

A lot of the legislation that was being discussed was really going to impact things globally. We had a lot of interest from Europeans and the rest of the world on what the revenge tax, for example, was going to do to deals and just the way that global commerce happened. So it was a period of pretty intense uncertainty. That's really what one of the things that impacts deals or deal volumes the most. But you know, that was only that was sort of short lived. And as the summer moved on, we got final tax legislation. It didn't have the revenge tax in it. People were certainly happy to hear that.

 

Nate Collins:

And I think we all can relate to the fact that sort of the shock of the new tariff phenomenon started to perhaps we started to become numb to it or it just wasn't as sort of shocking as it was initially. And we started to see deals really come back strong as the summer progressed. And I think from our vantage point it was initially more like bulge bracket or mega deals that were coming back to life. Some of the big headlines certainly focused on that, but it's really since then bled into the middle market, the upper middle market. And as of right now in this moment, we're seeing a pretty significant post Labor Day push. And that's not only the case in North America, but in talking to clients in Europe and colleagues around the world, everybody seems pretty busy right now. And again, I think it's just the lack of or sort of the removal of those big factors that were driving uncertainty for a period of time there.

 

Jessica Wadd :

I agree with everything Nate said. Just a couple things that I will add is when you look closer over the year so far, exits from private equity are still down compared to last year and years before. So we are seeing, as Nate said, you know, Q1 was an increase in deal activity. Q2 was worse. Q3 has rebounded. I expect when we get the reports the whole thing is going to end up being fairly flat against last year. But there's been a big shift which started last year, but it's continued that most of the exits, most of the sales are actually going to strategic buyers. So companies adding to their businesses rather than movements between private equity or private equity making net new acquisitions.

 

Jessica Wadd :

And that's a big change from prior years.

 

Nate Collins :

Yeah, just add to that. I mean, it's absolutely true that we're seeing a ton of volume right now, but we're not from a private equity specific vantage point. I don't feel like we're out of the woods yet at all in the context of a bit of a log jam. And I don't want to paint that too broadly, it isn't the case for all of private equity. But there has been an increase. Holding periods have increased significantly. We've gone from kind of traditional three to five years. So I've seen some stats for segments of the market that are as much as five to seven years.

 

Nate Collins:

And so it's been difficult to exit at a value that makes sense. And of course difficult to deploy capital as well with such a sort of expectation gap around value. So volumes are up. I think everybody's happy in this very moment right now, but we're going to need to see it sustain itself. So trying to kind of get back to a normal, healthy environment where capital is flowing in and out and deal volumes are sort of consistent.

 

Jessica Wadd:

Yeah. And connected to that, one thing we talk a lot about the dry powder that's been sitting around for a while. One thing we don't, I think, talk enough about is the follow on impacts that that's having. So Nate just said we're not getting capital flowing through the private markets. And when you look at the first half of 2025, the capital raise by private equity. So like the share of capital that was moving into the private markets versus other markets, it was down significantly 54% compared to 2024. So, like, it's just things are still kind of stagnated in the private markets.

 

Chris Sparenberg:

And we're all watching the IPO pipeline here as well and trying to Find an end or a transition from the vicious cycle to the virtuous cycle. Right. More exits, more capital returned to investors, more subsequent funds raised. Certainly something on all of our minds. With the topic of trends in mind here, can you take us through some of the trends that you're observing in deal structuring and exit strategies in the current economic climate Now?

 

Jessica Wadd:

I'll start us out here and hand it over to Nate. So one of the things that BDO predicted based on some research we did with private equity leaders at the end of last year and the beginning of this year, was that a lot of the deals were going to be financed using equity rather than debt. And we're going to see a significant shift and that really has come to pass. So there were a few recent articles in Bloomberg and Financial Times looking back over the first three, three quarters or almost three quarters of the year and that huge move, I think that's connected to the dry powder, it's connected to the lack of movement. And of course his insur interest rates have been historically high. They're not expected to continue growing anymore. So Nate, I don't know. Are you.

 

Jessica Wadd:

Do you think this move to leveraging equity for financing deals is going to continue to grow or do you think we're starting to level out on.

 

Nate Collins:

I mean I think the drivers of it have been again there's a lot of dry powder, there's a lot of pressure to deploy capital. If you're a financial sponsor, it's been difficult. People have had to been creative in ways they get deals done and so they may be putting forth offers Lois, what have you that have a full equity backstop. They're just willing to do deals in that manner and maybe they want to recap it later, maybe they don't. I do think the deal markets are lenders are open for business. They're eager to deploy capital as well. Obviously the underwriting is a little different than what we've seen in recent years. But we feel like the deals we're seeing upper mid market international deals, the banks are showing up and they're not making it too difficult.

 

Nate Collins:

But yes, I've seen more all equity deals and than I have in recent periods this year and I've definitely seen a good healthy amount of full equity backstop. We plan to use debt but we will close without it. I would also mention one other thing that we continue to see in the international context and I think it's just again reflecting the challenges folks had over the last two to three year period with all the disruption and rising interest rates and changing tax laws and like sluggish top line growth in certain industries. And that's really structuring for I guess I would say a really healthy sort of downside risk managed operating structure and like global treasury structure. And that's always important. But I have found that our private equity and other investors that are putting together multi jurisdictional businesses, they're extremely focused on where cash is getting generated, where cash is getting burned, and their ability to move it around outside the ordinary course of business if there's a change in circumstance, if renewals aren't as healthy as they expect them to be, if they need to recap somewhere and move cash around for a strategic build out or what have you. And so just that that increased focus on it I think is perhaps a little bit of an overhang from how shocking or the difficulties they had when you had a multitude of factors coming together and put making a real significant cash crunch. So there's definitely a premium on that and I guess optionality has just become really dominant in the mind of financial sponsors.

 

Jessica Wadd:

Yeah, and somewhat related to that. Nate, I know when we talked earlier this year I was expecting that we would see a significant increase in investment from foreign funds into the US we certainly had a lot of buy side inquiries coming in from our teams across the world where their clients wanted to look at the US market. But as I was pulling the data the other day and looking back, it appears that those deals really haven't happened. So there's been an increase in interest, but I'm not seeing, I'm actually seeing a depression in the cross border transactions, which I think ties back again to what you've been saying about uncertainty, the risks that everybody's trying to hedge against. It's one thing to deal with business questions, it's another thing to layer in these sort of regulatory and currency risks as well. Is that similar to what you were seeing on your side, Nate?

 

Nate Collins :

Yeah, and I think it, I would say yes. It's been perhaps a sort of decline in hesitation from April to today. Probably pretty linear I would say in terms of what we're seeing. But you know, if you think back to April of 2025, you had public companies coming out and saying we can't forecast like we, there's just too much uncertainty. We can't tell you what the next quarter looks like. And that obviously manifests for folks that are trying to put capital to work or sell a business. That said, I think the folks that have stayed the busiest during all the lumpiness are Ones that are confident and sophisticated enough to do like cross complex cross border transactions, whether that be sort of hairier complex carve outs or just acquiring businesses that, you know, operate across geographies where financing and the debt side of things becomes much more complicated. The value creation plan is maybe a little bit harder to get your arms wrapped around.

 

Nate Collins:

The people that have the capabilities to transact with more complexity have stayed busy. And for those that kind of have a more traditional single investing only in North America or European funds investing only in Europe, I think they've had a harder time putting deals together.

 

Jessica Wadd:

Yeah, that resonates with me a lot. When you look at the, I said before, right, volumes are down overall in deals, but the value is actually up. Right. So it's definitely larger, more complex deals and we are seeing a ton of more carve out activity.

 

Jocelyn Lewis:

So it's certainly clear that deal structures are becoming more creative and complex in response to some of that uncertainty and challenges that are really prevalent throughout the markets. And that leads to the broader question of how these current market conditions are shaping the overall strategies and companies, how they're really using these particular strategies as they're thinking about transacting in this landscape. But one other question for you both, thinking of the LP community as well, how are these market conditions, more complex type of structures impacting the LPs within this deal making landscape?

 

Nate Collins:

Yeah, I think the biggest impact we're seeing on LPs is asset class balancing as public markets have shifted in value in significant ways and they're looking at their allocation across asset classes. We of course are also seeing LPs hesitant to invest capital in new fundraises when they don't feel like they're, they've gotten the liquidity on existing vintages. And so I think they are absolutely impacted by what, again, I don't want to say all of private equity is experiencing this, but there is a theme in private equity where there has been a bit of a log jam. Exits are not happening at the same rate that they would like them to because they can't put together the value that they want. That makes sense and that obviously impacts the front end input of fundraising. And so LPs I think are having to find alternative ways to put their capital to work. We've of course all heard about LPs wanting to invest directly, like as co investors or alongside more directly via fundless sponsors or otherwise. And then the other big theme that we're seeing is continuation vehicles as a way for private equity funds to provide liquidity to certain Investors but not fully exit their investments because they don't feel like they're right at this time time.

 

Nate Collins:

So continuation vehicles have been really popular as sort of a band aid or a sort of modification to overall strategy around through coding capital. But I think by and large LP still view private equity investing as a really important and investment strategy that has long range potential.

 

Jessica Wadd:

Yeah, I agree with Nate and I'd say again, when you look at the, the congestion and the limited flow in what's happening right, is those continuation people, the LPs are keeping their money where it is in part because they don't have a lot of better choices and the fresh capital they have, they're balancing in other places. So we're seeing investment in real assets going up quite a bit.

 

Chris Sparenberg :

This has been a great conversation so far on the current climate and environment for deal activity as we cast our eyes to the future. Would love to hear your thoughts on the key trends and challenges that you think are coming or that private equity might face and what the deal environment might look like in the next 12 to 18 months.

 

Jessica Wadd:

Yeah, the first thing I'd like to say is when we Compare today to 2021 and early 2022, it's easy to get a little doom and gloom. But I want us to put all of this in context that the number of acquisitions done by private equity in 1H25 was higher than any half except the second half of 2020 through the first half of 2022. So we are still in an environment where a lot of good, good deals are being done and there are a lot of opportunities to drive returns for investors and in the private equity businesses. So I expect to see that to continue. And I'm really excited by the rebounds that we're seeing in the technology sector and the increased activity in the industrials sector. And so I think that as the uncertainty around tariffs hopefully reduces a bit, people get kind of somewhat accustomed to a new normal. The log jam continues to clear and we get to see some really increased creativity and activity in the tech and industrial sectors.

 

Nate Collins :

Yeah, I would share that sentiment. I think if you put yourself in the shoes of deal makers and what they've gone through in the last two to three years, they've had to get really thoughtful and strategic about how they go about putting deals together, whether they're exiting or deploying new capital. And I think that sort of period of increased focus lends itself well to when the markets are kind of freeing up a bit. We, I think that discipline, that strategy is going to serve folks. Well, the biggest thing as of late that continues to put pressure on volume, especially in the context of like traditional financial sponsor private equity investing, is just this gap in expectation for value between buyers and sellers. And we've seen folks have a lot of success introducing all the tried and true tools like earnouts and different things with rollover and sort of more complicated earnouts that key off of the financial sponsors ultimate return on equity. But you know, we of course have a lot going on globally, right. Geopolitical and macroeconomic disruption.

 

Nate Collins:

But I think absent anything really significant there, if dealmakers continue can continue to find a way to close the gap for any existing differing expectations and if that gap just naturally continues to close as we get sort of farther and farther away from the peak that Jessica was referencing, I don't know, I feel like we have an actual real chance at just good solid return to sort of normal volumes. And I don't think anybody wants to see the crazy peak that we all experienced for a period of time there. But we don't want the LS either. I think folks are very excited about just good consistency. And frankly I feel like as we rolled into 2025 the markets were pretty ready for that and it was just some of the disruption we referenced earlier in April and early part of the summer that kind of threw a wrench in things. So with that behind us, I'm pretty optimistic that this sort of congestion we've talked about here from a few different angles is going to start to be relieved. And 2026 could look pretty good.

 

Jessica Wadd:

Yeah. And on top of that, I'm also really hopeful that these past couple of years have driven some private equity firms to adjust some of their playbook to look at longer holding periods and drive different forms of value from the portfolio companies that they've got. And I, I think there's a pretty good shot that as we roll into 2026 and 2027, we're going to have a different segmentation of the market where we've got a larger number and a greater variety of firms that have that in their toolbox and are offering a different value proposition both to sellers who want a life for their business after them and to the investors that have different time horizons and different goals.

 

Chris Sparenberg :

And hopefully we get a little bit of a tailwind from interest rates coming down, reducing the cost of capital and maybe introducing some normalcy in that way too.

 

Jessica Wadd [00:22:21]:

Fingers and toes, press crossing everything.

 

Jocelyn Lewis:

Thank you for tuning into this episode of Private Markets 360. We hope you enjoyed our engaging conversation with Nate Collins, National Transaction Tax Advisory Practice Leader, and Jessica Wad, Principal and Strategy and Innovation Segment Leader at bdo. Their combined expertise in tax advisory and management consulting has provided us with valuable insights into the evolving landscape of private equity and the current state of private markets. From discussing the challenges and opportunities in deal structuring to the importance of staying informed on tax implications, Nate and Jessica have highlighted key themes and strategies essential for navigating today's complex investment environment. Their perspectives on emerging trends and the need for adaptability in the shifting landscape are particularly relevant to for investors and firms alike. If you enjoyed this episode, please subscribe to Private Markets 360 and leave us a review. Join us next time as we continue to explore the world of private markets and bring you more insights from industry leaders. Until then, keep thinking critically and exploring the opportunities that lie ahead in private markets.

 

Jocelyn Lewis :

Thank you.