The Pipeline: M&A and IPO Insights | S.3 Ep. 6 - Cross-border M&A hotspots emerge from a  ’vortex of volatility’

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Joe Mantone   00:00:00

Welcome to another episode of the pipeline, an S&P Global Market Intelligence podcast that dives deep into the world of M&A and IPOs. I'm your host, Joe Mantone. And today, I will speak with Paul Aversano, a Managing Director with Alvarez & Marcel. Paul is the practice leader of A&M's Global Transaction Advisory Group. And I believe he's been doing it for about 2 decades now. And Paul also leads the firm's efforts in delivering cross-border M&A services and cross-border M&A will be the focus of today's conversation. It's a topic that we have yet to explore on the pipeline, and I thought it would be a good one to unpack. So Paul, thanks for joining us today.

Paul Aversano   00:00:52

Thank you for having me. Appreciate it.

Joe Mantone   00:00:54

All right. Paul, to start off, I wanted to ask you a bit about your background. Looking over your bio, I noticed that you have a Bachelor's degree in accounting from Binghamton University, a great school. When you were studying accounting, did you think that you would get into transaction advisory work?

Paul Aversano   00:01:14

No. Actually, when I graduated from Bingamton in the early '90s, transaction advisory work wasn't even a thing that the big 4, the big 6 at the time accounting firms did. Private equity wasn't as much on the scene as it is obviously today. And quite frankly, I was an accounting major, not because I loved accounting, it's just because they were the ones that got jobs. Big 4 would just hire so many people. So I went to accounting and I thought maybe I'd get an MBA, maybe I would go to law school. And I started my career in audit at Arthur Anderson, and I spent 10 years there. And then when that firm, I was there at the very end, when that firm collapsed under Enron, I ended up going to EA. -- and I was a partner at EY. But early in my career, after doing audit for a couple of years, private equity started to come on the scene. And Author Anderson made a decision to start what they call the financial buyers Initiative, FBI, and asked a handful of us who maybe had an interest in doing deals to spin out of audit and focus on this new market called private equity or financial buyers. And that was the mid-90s, and I started doing this thing called due diligence that we were inventing at the time, financial and accounting due diligence, quality of earnings. and never looked back.

Joe Mantone   00:02:28

So you're at Arthur Anderson at the wrong time, but you got into the alternative asset management due diligence work at the right time, but that's really what I...

Paul Aversano   00:02:36

Absolutely. said, yes, I'm very lucky.

Joe Mantone   00:02:39

So what type of work does A&M do on deals now? Is it due diligence work that you're doing?

Paul Aversano   00:02:45

Well, A&M broadly, as a firm, we're a full-service global professional services firm. But when it comes to transactions, whether it be private equity or corporate strategic transactions, we really play, and we've built this over the last 20 years across the entire investment life cycle. So pre-acquisition, anything from a due diligence perspective, from finance, accounting, tax, IT, HR, operational, commercial, ESG, you name it, essentially, we can cover everything pre-acquisition. But really, the specialty of A&M is post-transaction value creation. operational performance improvement, functional industry expertise. So during the period of ownership, that value creation part is really what A&M specializes in. And then we work on the exit side, whether it be sell-side due diligence, exit readiness, IPO readiness, we do a lot of. One of the things we don't do are audits. We deliberately keep the audits out, so we're not subject to Sarbanes-Oxley regulations, SEC oversight. So we're able to be a little bit more commercial and flexible in serving our clients since we don't have to worry about audit conflicts of interest.

Joe Mantone   00:03:53

So your group does the whole continuum there.

Paul Aversano   00:03:55

The firm does the whole continuum. The group that I lead and started cofounded 20 years ago, given my background, Big 4 accounting, we do financial and accounting due diligence, buy side, sell side, and then we do a lot of capital markets and accounting advisory work as well. So we have a group of about 1,500, all ex Big 4 CPAs or chartered accountants in 45 offices around the world. serving private equity and corporate acquirers and private equity portfolio companies. So in my role, having built this globally, I spend a lot of time visiting clients and our own people around the world, which is where I think I have a little bit of a unique insight into cross-border M&A.

Joe Mantone   00:04:36

You said 1,500 people are on the group.

Paul Aversano   00:04:38

About 1,500 yes.

Joe Mantone   00:04:40

How big was it when you started?

Paul Aversano   00:04:42

One me. I should say 3. There was 3 of us who came together to start the business. And I was hired away from EY, where I ran EY's New York middle market private equity practice, but Tony Alvarez and Brian Marsal had reached out to me. And I had met them because A&M, interestingly enough, was the restructuring firm at Arthor Anderson, which is really the heritage of A&M. It's a 43-year-old firm with a heritage in restructuring, turnaround and crisis management. And they saw an opportunity when Anderson collapsed and the market shifting in the accounting world with the big 4 and otherwise to take their boutique restructuring firm and grow it into a global professional services firm. And M&A is a great business in and of itself, but it's also countercyclical to restructuring. So when they wanted to get into M&A and having learned from the author Anderson days, they reached out to some of the people that they knew, found their way to me. And luckily enough, I was smart enough to entertain the opportunity. And 20 years later, here we are. We're celebrating the 20th anniversary of what we call Global TAG, the Transaction Advisory Group this year, 20 years since inception. And we've built the largest global provider of transaction services outside of the big 4. And in some countries, we're actually bigger than some of the big 4.

Joe Mantone   00:05:56

Intresting, yes that's I appreciate the background there. That's all good to know. Okay. So diving into cross-border M&A activity, where are we seeing the most cross-border M&A transactions right now?

Paul Aversano   00:06:11

Yes. Well, it's interesting. I've been using this phrase for years, and I thought it would die down, it was temporary, but it keeps getting broader. I call it the world is an increasingly complex place when it comes to M&A and uncertainty. And from an M&A perspective, what I've been saying is we're in a vortex of volatility, right, swirling around the world. The one thing that whether it be the public equity markets or private investors, private equity, the one thing that people do not like is uncertainty, right? And whatever the markets are, if there's at least some level of certainty, the markets will naturally adjust to a new normal, whatever that is, right? And right now, it's difficult to figure that out. The things that drive uncertainty all around the world, trade, tariffs, interest rates, inflation, geopolitical risk, foreign exchange rates are a big thing that drive cross-border activity. So when you look at all these things, my job at Alvarez & Marsal in building a global business is to understand the movement of capital around the world, the markets that drive that and where our clients are going to be. And I would say, if I had to pick a couple of hotspots around the world right now currently, one of them I would say is the Middle East. Clearly, with the level of capital that exists in the Middle East, largely with the sovereign wealth funds and whatnot who we work a lot with. They have -- they're almost immune because of the level of capital that they have and how it's derived through oil revenues and otherwise. They're almost immune from market cyclicality, right? They can invest in any market. But what's happening in the Middle East, you're seeing a lot of -- while the capital is there, a lot of the investment activity is outside of the Middle East because those sovereign wealth funds want to diversify away from oil revenues, right, because they see a future that's maybe based on EV or more renewables. So they want to at least hedge their bets and diversify away from that. And they also want to diversify away from the region for geopolitical reasons and whatnot. So I think one area that's been hot, and I think will continue to be hot is Middle East, given the level of capital and likely outflows from the Middle East to all other parts of the world. So that's one. Second one I would say is where I recently just came back from last week and Alvarez and Marcel just expanded into Japan. Japan is a very hot market right now. You're seeing a lot of capital flow into Japan for a couple of reasons. Japan is going through some regulatory changes that are causing companies to potentially divest or look, if you're a listed company in Japan, look at providing a certain level of required returns to the shareholders. And any type of change, whether it be regulatory or otherwise, drives opportunity from an M&A perspective. And in Japan, you have regulatory changes, you have demographic shifts where you have the aging of the population. There's a lot of founder-owned businesses that don't have succession planning, will need to exit. And the biggest thing -- one of the biggest things driving Japan is valuation. The yen has been very weak, particularly against the U.S. dollar. I was in Japan a couple of months ago, and it was a 34-year low, the yen against the dollar. In a high valuation environment, let's say, in North America and some parts of EMEA, if you can get better valuations in places like Japan, that's going to be attractive and attract capital. So we've expanded as a firm into Japan. I've been to Japan 5 times in the last 2 years, and we're seeing an incredible amount of activity from our global clients, both corporate and strategic into Japan. So I would put Japan as the second in addition to Middle East. And the other place where I was not too long ago, which is also very hot is India. India and Southeast Asia because I think coming out of COVID and some of the geopolitical fallout between, let's say, the U.S. and China, whether it be companies diversifying their supply chain outside of China into other low-cost jurisdictions being Southeast Asia or India or just simply to get away from some of the potential perceived geopolitical risk in China or North Asia. There's a lot of activity in Southeast Asia and India as well. And the Indian stock market has been on a tear. We've had clients in India who -- and I couldn't believe this when I was talking to them, they're investing at 20x, and they're exiting in the Indian IPO market at greater than that. So the India market is really hot and Southeast Asia is hot as well as people have looked to diversify away from what I'll call North Asia. So I would say those are probably the hottest parts in the world that we're seeing right now.

Joe Mantone   00:10:43

Yes. That's great. A lot there to go through. And, you opened the office in Japan just because you saw this cross-border activity or.

Paul Aversano   00:10:50

No. I think, listen, there's a couple of reasons. The -- when you look at Alberoz & Marsal, like I said, 43-year-old firm, we have been expanding globally, I would say, on a real focused basis, at least over the last 5 to 10 years. And it's a U.S.-based firm. So we started in the U.S., then we expanded throughout EMEA. And the last places we need to be are throughout Asia. And that's really where the last couple of years, we've been focusing our efforts. So Japan, fourth largest economy in the world after the U.S., China and then Germany, right? Now you have Japan after that. I don't know if a lot of people knew that Japan has the fourth largest GDP in the world. It's also a very insiller market. If you're not in Japan, you're not doing work in Japan, right? You have to be there boots on the ground. So one of the things that caused our expansion into Japan, and we opened up offices both in Tokyo and in Osaka. We have a satellite office. We did that simultaneously. The number one, just as a global full-service professional services firm, we have to be in Japan to serve our global clients. So that was just a necessity. But really, it was driven by client demand. We're working with larger global clients, whether they be corporates or private equity financial buyers, and we have to be able to serve them wherever they go. And there was one of our big global private equity clients opened up an office a week before ours in Japan. And I'm like, oh, I'm talking to them and like we'll be there next week opening our offices and we do a scybreaking official ceremony in Japan for good luck. And part of it is we just need to be there as part of a global professional services firm. Part of it is we need to be there to serve our global clients, whether they be private equity and corporates, -- and a big part of it is we love the local market, right, for the demographic reasons I explained, there are some elements in the market there that I think really could be well served by a diversified global professional services firm like A&M that kind of does things that no other firm really does. So we viewed it as a unique opportunity for our firm as well.

Joe Mantone   00:12:42

Got it. Makes sense. Okay. And then just to zero in on the U.S. companies a bit. Where are U.S. companies expressing interest for cross-border deals? Is it -- are they looking to do deals in Japan and India? Absolutely.

Paul Aversano   00:12:55

Yes. I would say there's a couple of things. If I had to highlight, I would say, yes, Japan, I would say Asia in general, right, whether it be Southeast Asia, India, those are hot areas. Certain parts of EMEA across Europe, where valuations may not be as high. It's really like a drive for, call it, value, right? Where can you get the best valuations where you like the local established market. So there's parts of EMEA that are attractive. And then what I'll say really recently, really recently, like within the last couple of weeks, we're starting to hear over the last couple of years with some of the geopolitical risk between the U.S. and China, as you've read, and I'm sure you're aware, many people have been pulling back out of China, whether they be investors, whether they be professional services firms, companies. We never believed in that, right? We take a long-term view and the second largest economy in the world, I don't think you could ever count China out. So not only did we not pull out our people in China, like most other people did, we actually doubled down, and we went deep into China and Hong Kong and are still expanding. And it's been a great time for us to pick up really good local talent. And not surprising, and luckily, we were right on this bet, we're starting to see and hear folks view China and Hong Kong as a ripe environment because one reason, there's less competition because everybody pulled out, right? So now if you survey the world and you can get comfortable with some of the risks in China, and there's a lot of firms that have been investing in China for many years and are comfortable with those risks. And now there's less competition and maybe the government wants to bring in more foreign capital. So I would say one of the current trends I think you're going to be hearing more about is folks reentering the North Asian markets from an M&A perspective.

Joe Mantone   00:14:42

Yes, it's such a big opportunity there. It's hard for companies to.

Paul Aversano   00:14:45

It's hard to -- it's hard to...

Joe Mantone   00:14:47

So what sectors are we seeing some cross-border activity?

Paul Aversano   00:14:51

Well, the obvious one is obviously, whether it be software and technology, things that are driven by AI, right? AI is undercutting a lot of M&A activity depending on what side of that trade you're on, right? If you need to buy certain things to shore up your technology strategy or on the flip side, if your business is being disrupted by technology and AI, you're going to look to divest those things. So that's a segment that is not being driven by, what I'll say, any other opportunities other than largely AI and just tech in general. I would say when you look at other sectors, one of the sectors that we're seeing a lot of activity in is automotive and industrials. When you look at automotive, there's so many changes in automotive as well, right, whether you've got the move from combustion engines to EV, now maybe back to combustion, whether you have ridesharing, autonomous vehicles. There's just so much activity around automotive. We're seeing that. And that was also one of the main drivers of us getting into Japan. We have a large automotive practice at Alvarez & Marsal -- and we got to be able to serve clients in Japan as well as part of that. That's a big industry that we're seeing. There are some sectors that also, I would say, they're very country specific. So it's not -- it doesn't lend itself to global M&A. But health care is always a hot area. There's regulatory challenges in health care and a lot of undercurrents in health care, financial services and some of the subsectors of financial services are also interesting. And a new one, which is interesting that came on, I would say, in the last year, aerospace and defense is a big one because if you look at what's been happening, the shift to, call it, nationalism, right, and less away from globalization is causing countries to reinvest in their aerospace and defense system. We just hired someone in Japan because the Japanese government is focused on what they call space and security. And that's an area that we're seeing an increased level of interest from our clients around the world. So we have luckily an aerospace and defense team at A&M, and we're focused on that. And I would also say that also dovetails the other big industry area that we're seeing all over the world is energy and infrastructure. And infrastructure could be as basic as you think toll roads, dams, bridges, but it's also as broad as data centers, warehouses, parking lots. So that whole area is also a big industry focus that we're seeing in M&A across the world. We were having those conversations in Australia. We were having those conversations in India as well as Japan.

Joe Mantone   00:17:19

Yes. You mentioned defense. We just put out our 2026 big picture outlook reports. And in our M&A one, our private equity writer mentioned PE has been really investing in defense and now that's expected to continue.

Paul Aversano   00:17:33

Yes. It's interesting because every country -- and it's not just like it's every country we're talking to, that's a sector that they're focused on. We just did a call with a client in Australia earlier this week. And one of their big areas -- new areas of focus, they told us over the next 6 months, they're going to be focused on is defense.

Joe Mantone   00:17:51

Intresting, yes okay. And then you mentioned some of the geopolitical conflicts. I was just curious about regulatory approval of transactions. Has it changed much in 2025?

Paul Aversano   00:18:04

I think has it changed much in '25? No, has it changed much over the last couple of years? Yes. With CFIUS in the U.S. there's definitely an increased scrutiny on money coming into the U.S., inbound deals into the U.S. I would say there's an increased level of scrutiny where they're looking at foreign investors where historically, I would say, if you were -- they would pick up direct foreign investment, right? So if it was like a Chinese company coming into the U.S., okay, that would get picked up. But what's happening now and it's been happening over the last year or 2 is they're actually digging in. It could be a U.S. company that's doing a deal in the U.S., but they're actually digging into the U.S. ownership structure. And whether if it's a financial buyer, if there are LPs or if it's a company, if the ownership structure, they're looking to see who are the true owners of these businesses that are actually doing the acquisitions. So they're diving deeper into the businesses to really look at who's coming in from an international perspective. That's a relatively new phenomenon over the last couple of 2 years or so, where historically, it was easy to identify a foreign buyer. Now if those foreign buyers are investing in domestic companies that are then doing domestic deals, they're looking through that. So I would say there is an increased scrutiny in the U.S. There's probably an increased scrutiny within China going the other way. Although the deals that we're working on in China, we have offices in Beijing and Shanghai, and we're doing a lot of domestic China deals within China. So we're doing work with state-owned enterprises and things like that. So we're not getting as caught up. We're not seeing as many people come into China because as we talked about earlier, people are pulling back. But there's still a lot of within China, intra-China M&A that we're involved in. And I think that will start to open up from a cross-border perspective. But these things ebb and flow with geopolitical relationships amongst governments and whatnot. And I think a lot of the trade and tariff discussions, right, between the U.S. and all these trade partners around the world, a lot of them have been settled. Some of the big ones not to be settled yet are people like China and whatnot. But I think ultimately, the world is an increasingly global place, and you have to do business globally. And I think these things will continue to get settled. And as they do, there'll be less uncertainty in the system, and that will in turn drive more M&A.

Joe Mantone   00:20:25

And with the challenges from CFIUS, is it -- are deals getting halted? Or is it just elongating the process?

Paul Aversano   00:20:33

Listen, personally, I haven't seen deals getting halted. I would say a little bit on the elongation. But really, what it is, it's folks having the discussion. And it could be either CFIUS or even things like the FTC like antitrust as well because it's not just the cross-border investment, it could just be the antitrust rules as well, which are also taking a strong look. It's really being factored in much earlier in investment decisions, okay? Like I was down earlier this week as well with a large public company in the U.S. potentially looking at a large transaction. And there seem to be a lot more focus on how and if we can get this through antitrust. So I think what's on everyone's mind, and people are definitely looking at deal strategies and investment strategies with an eye towards regulators, more so than in the past. And what's interesting is because historically, that wasn't as big of a factor. What was really a big factor was always financing, right, in the financing markets and interest rates and can we finance it. And now with the advent of private credit, there's so much capital in the system, that's really not that much of an issue anymore, and it's more on the regulatory side. So these things ebb and flow over time.

Joe Mantone   00:21:42

Yes. Yes. That makes sense. There's so much money floating around out there.

Paul Aversano   00:21:46

So much money floating around. I always say I think there's more money in the system than there are companies to buy.

Joe Mantone   00:21:50

Yes. Definitely saw that with the boom in SPACs a few years ago.

Paul Aversano   00:21:54

Absolutely.

Joe Mantone   00:21:56

So I guess, is regulatory then like the top challenge right now for cross-border deals?

Paul Aversano   00:22:02

No. The top challenge right now, and again, it's uncertainty and the regulatory is may be a part of that. But to be frank, like when you look at -- here's an example. If you look at tariffs, okay? And if you don't know -- if you're a domestic company in the U.S. and you don't know what a tariff agreement is going to be with a company that's a major supplier to a company you're going to buy, how do you -- if you don't know the cost of goods sold of a company, how do you value that company? And do you make an investment decision on what it is today? And then once you're in the company, all of a sudden, there's a tariff -- pick up, look at Switzerland, right? 39% tariffs and then shortly rolled back to something, I don't know whether it's 15% now. I can't even keep track anymore. If you're a company looking to be acquired and you're sourcing raw materials or whatever from Switzerland, right? And what do I factor in my valuation? What's the profit margin of this company? What's the EBITDA? What are the tariffs? What are they, first of all? And then second, what are they going to be? So that uncertainty, like you don't know what to do. So what ends up happening is you do nothing, right? And that's why things get gummed up. It doesn't matter if the tariffs are 39 or 15. What it matters is that we know what they are and what they're going to be. And then everybody will -- it may take a little time for the system looks like a snake digesting, like it's got to work its way through the system. But once it does, then everyone knows what the new normal is and then you can adjust accordingly, buyer and seller valuation expectations. But if you don't know that, what do you do? And that's the challenge. So uncertainty is broadly the biggest challenge. And then there are so many things that factor into that.

Joe Mantone   00:23:39

So are we currently in the -- is the current state right now where deals are -- people are still on the sidelines for transaction?

Paul Aversano   00:23:47

No, it's starting -- so that's a good question. I would say we're coming out of the uncertainty. Listen, at the end of the day, strategic acquirers have the lack of a better word, luxury of sitting on the sidelines if they don't like the M&A market unless they have to transact for competitive reasons or whatnot. Financial buyers, on the other hand, are in the business of doing deals, right? They can only wait so long. They have to buy and they have to sell, right? They have to deploy capital and to realize investments to get returns back to their LPs. So when you look at the financial buyers, I think we're starting to see falling. I can tell you, we're one of the largest providers of sell-side due diligence in the United States. And obviously, the sell sides then lead to buy side. So we're brought in, it's typically like 2- to 3-month lead time before you get on to the buy side and companies come out to sell. So we see an increased activity significant on sell-side due diligence processes with investment banks that we work with, which then indicates 2 to 3 months, we're going to see that. Now we also saw -- we had a record level of sell sides in our pipeline in the first calendar quarter of '25 because people thought with Donald Trump in the office, it was going to be an M&A bonanza, and then he surprised everyone with his trade and tariff policy. So all those got deferred and the pipeline has been stagnant for a while. So it's a big backup. But I think when you get through the holidays and you start to get to mid-January, February, I think into the second calendar quarter of next year, I'm pretty bullish on M&A activity in general. And again, some of the things you read today -- it says, oh, big M&A activity, the investment banks released their earnings and it's record fees from. But you got to dig into that, right? They go by value of transactions, right? And you could have a couple -- there's a couple of large strategic corporate transactions that drive fees, right, banking fees. So value is a skewed measure in my opinion. I look and we look at A&M at volume, right? I want to see how many deals there are. And the number of deals are still down. So if you read the earnings reports of these banks, you'll see oh, high trading -- yes, because there's a couple of large corporates, strategic deals that are driving M&A fees. But when you look at volume, it's still down, right? Now it's starting to come back up. But when you see volume come up and velocity of deals come up, that's more of a healthy market. So I'm not as concerned about value. I'm concerned about volume. So I think we're starting to see the volume pick up. And I think that's going to just continue, barring any black swan unforeseen event. But I think knowing what we know now and the way things are trending, interest rates, inflation, trade, geopolitics, I just think we're headed in the right direction from an M&A activity perspective.

Joe Mantone   00:26:35

And then you mentioned the pickup in the sell side. So is that sell-side assignments coming from private equity exiting?

Paul Aversano   00:26:42

Yes, it could be -- it comes from a variety of places. It could be corporate divestitures where they want to sell noncore businesses where we come in and do and position those assets for sale. A lot of it comes from private equity portfolio companies where they, hey, we want to go to market and help us get the assets ready for sale. Some of it comes from our investment banking relationships because they're usually engaged before we are, and they'll say, let's bring in A&M to help us get this asset ready for sale. Some of it comes from law firms where we have relationships with because they get brought in. And we work alongside with that whole investment community to get these assets ready for sale. And it could also be ready for the capital markets because the IPO window, which we shouldn't neglect to think about, has also been sporadically up and down open. A lot of times, more recently, we've been running dual processes on the sell side, right? Let's run a strategic sale process, but also a capital markets IPO readiness process and then let's see in 3 months when we're ready to go to market, where we get a better valuation from, depending on which one that's going to be the way we're going to go. So we've been seeing a lot more dual processes that we've been getting clients ready for.

Joe Mantone   00:27:48

Yes. That's definitely a good sign for the deal market. It seems like for a long time, we weren't seeing much on the M&A or the IPO side. Right. Okay. Yes, I want to ask you about the evolution of cross-border M&A. I guess from everything you're saying, the biggest change probably has probably just been the private equity coming in with building up its assets under management. And has that been the biggest change during your career on thinking about cross-border M&A?

Paul Aversano   00:28:16

I think when you look at cross-border M&A, if I look -- take a long window back, let's say, even like I said, I've been doing this for almost 30 years. There's much more of it in general, right? Like -- and I think not really because of the size of the firms, it's just the interrelation of world economies. Like I said, the world is just an increasingly global place. And you're seeing firms look to diversify. And there's also, to your point on private equity, I talk about for years, there's this thing called the barbell effect, right, where equity funds are really headed in 2 directions, right? They're headed either to the larger side of the barbell, where they're becoming really like diversified asset managers, right, where you used to be a private equity fund, now you do credit, real estate, and now they're looking to get into wealth management, managing your 401(k) money, right? And you got these pushing trillion dollar asset managers, right? They're not even private equity funds anymore. And on the other side, you have folks that are going smaller, but very deep in particular industries, right? And they compete because they're just so specialized in a particular industry. When there's so much capital out there, one of the things I jokingly say is everybody's money is the same color, right? So why would you do a transaction with this person versus this person? And there's a variety of reasons for that, but it's really what they bring to the table. And some firms are so large that they bring so much to the table and just by the nature of the size of that firm, they're going to see all deals, and you could guess what some of those big names are. Some firms are so small and specialized that they're going to see everything in a particular industry because they just cover that industry so well and so deeply, and they bring unique expertise and operational expertise in the various industries. The firms that are challenged are the midsized ones that are what I'll call our generalists, right, that focus on a variety of industries. They're not big enough of scale where they can compete with the big boys and get access to that. They're not small and niche enough where they're that deep in any particular industry. Those ones are getting squeezed to one side or the other of the barbell or they may not make it at all. And now when you look at that barbell effect, the ones that are very large that are diversifying, they're not just diversifying by asset class, they're diversifying by geography, right? And that is also driving cross-border M&A. You're seeing funds that are raising now specific Asia funds, specific Japan funds. Like we met with a fund in Japan that they just raised their fifth Japanese fund at USD 2.8 billion, Japan only, a pretty big fund, right? That's just Japan. Think about their family of funds across the world. I think there's a variety of reasons, but it's just -- it's diversification, asset diversification and risk management.

Joe Mantone   00:30:57

It certainly makes sense. You mentioned tariffs, just thinking about that a little bit. Has the tariff headwinds that have come out this year, has that affected investor buyer interest in U.S. companies at all?

Paul Aversano   00:31:13

I wouldn't say -- I couldn't say if it was affecting -- I have to imagine it is, but I don't have any concrete data on that. What I'll tell you is it's affecting deals all over the place, right? Even if you're a domestic buyer buying another domestic company, right, depending on the industry, how you operate, where you operate, it absolutely is a major factor in every investment decision we're seeing today regardless of where it is. So that is clearly a key area. And it's starting to die down as things start to get settled for those things that are unsettled, which are still big swaths of countries like China and Southeast Asia, India, those are big areas of supply chain into the global ecosystem. So if those tariff deals are not settled, that's going to really chill M&A.

Joe Mantone   00:31:58

Yes. And because of supply chain concerns, we see more companies pursue vertical integration to avoid.

Paul Aversano   00:32:05

Yes. Yes, I think you're seeing that. I think you're seeing a couple of things. A couple of people are looking to shift their supply chains into a more stable, lower-cost jurisdictions. That's why India has become increasingly attractive. It's a stable democratic government environment, large population, low cost, -- so that's why you're seeing some of these shifts. Same thing into Southeast Asia, people changing their supply chains or shifting their supply chains into places like Cambodia, Vietnam, Thailand. The problem is those countries can't handle the volume. You can't just overnight shift your supply chain to another jurisdiction. That's hard to do. It's hard to do operationally. It's hard to do from a capacity perspective. It's just another cog in the vortex of volatility.

Joe Mantone   00:32:57

Yes, yes, adding to the uncertainty. I want to ask about ESG. I think I found that old article quoted you we were talking about how global investors were prioritizing assets with a strong ESG footprint. Is that still something you're seeing right now?

Paul Aversano   00:33:16

We're not seeing nearly as much of a focus on it. But what I do believe -- listen, one of the key things that's still important today is value creation. If you think about the height of the M&A market, let's just say, it was 2021, okay? And folks bought deals in 2021 at very high valuations, okay? And in, let's say, the olden days, pre-2021, part of the benefit of doing transactions was multiple expansion, right? You buy in at 10x and you can count the market rising and maybe if you did nothing, you would sell it 12x, right? And what's happening now is the companies -- this is also a part of the slowdown in M&A. The companies that were purchased in 2021, so what was that? 4 years going on 5 years ago. So they have to start looking at realizing those investments after 5, 6 years. They were purchased at probably pretty high multiples. And if you know anything, multiples, I think you'd be lucky if you're not going to get multiple expansion, highly unlikely from 2021 in today's environment. If your multiples stayed the same, you'd be lucky. But in a lot of these instances, there's multiple contraction. So it happened in the reverse. If I bought it at 12, I may have to get out of 10, right? So in addition to that, with tariffs, rising costs, inflation, a difficult operating environment, the results of the business may not be as robust as you originally budgeted in your investment thesis. So before you can realize that investment or any type of gain on it, you first have to overcome the overall maybe poor performance of the underperformance of the business that you bought. And then you got to overcome that multiple potential contraction, then you got to add value on top of that. That takes time, right? And that's all operational performance improvement. That's what we get pulled in a lot. But that's why you're seeing long-dated funds, continuation funds, secondary deals because the value creation just hasn't had to happen to fully take hold yet. So I think going to your point now about ESG, we're seeing clients look at ways to add value to their investments where historically they did not. One good example of that is digital, right? Now I'm not a digital expert, but our digital experts at A&M will tell me every company needs a digital strategy. And if you're not monetizing data with a digital strategy, any company that sells or operates or even has a website needs to have a digital strategy. And that's a way to add value, right? ESG or we call it at A&M ETS for environmental, technical and sustainability, which is really where we're focused. There was a study that was done that shown that buyers will pay a premium for assets with an improved ESG footprint. And we're not talking about the controversial stuff of ESG. We're talking things that everybody can agree upon, right? Like I think everyone can agree upon, it's better to have a company that doesn't harm the environment than one that does. I don't think anyone is going to argue the other way. So if you have an improved ESG footprint in your company, lower carbon footprint, things like that, greater focus on sustainability, there are buyers out there who are willing to pay more of a premium for them. I don't think that's changed. Whether they publicly say it or not, I don't think that has changed.

Joe Mantone   00:36:39

Yes. Trying to get that value creation is certainly the key. All right, Paul, I think you spent a lot of time with us here. It might be the longest interview for the pipeline. But I really appreciate you taking all this time with us, and it was a great discussion here.

Paul Aversano   00:36:55

Yes. No, I appreciate it. Thanks for the time.

Joe Mantone   00:36:57

That will do it for this pipeline podcast. We thank Paul for joining us, and we thank you for listening.