Quantity and Quality
We get asked about deal flow a lot. There are two vectors to that topic: quantity and quality. And while it feels like higher volume should produce more winners (I’ve called our business a stone-flipping game, i.e., the more you turn over, the better you do), the past few months have me thinking a wider net mostly catches more junk.
Why that is, I’m not sure, but I know we’re not the only ones in our space complaining about a lack of quality deal flow. And that’s showing up in people not doing deals. Our CLO Taylor posted a stat from GF Data the other day showing that deal volume was down 40% in Q1 25, with the middle market reporting just 59 closed deals.
That’ll happen with low-quality flow.
What does low-quality flow look like? I wrote Monday about a company a PE firm was trying to sell that probably should just file for bankruptcy. I thought that would be the bottom, but a few days later we saw a construction business doing ~$60M of revenue but – thanks to thin margins, a troubled project, and a glacial cash conversion cycle (retainage is real) – less than $1M of cash flow.
Now, $1M isn’t nothing (shoutout Dr. Evil), but slogging through $60M of hard work to pocket it doesn’t make much sense. (That’s me; maybe I’m lazy.) What’s more, a lot of the work this company was doing was very high profile, which sounds good until you remember that being “big & important” is what lands one in the “highly scrutinized” quadrant of the risk plane (hence the revenue, margin, and cash-flow profile here).
I’m consistently amazed how much risk people take without being compensated for taking it. Because it’s not easy to do $60M worth of anything. But taking home less than 2% of that puts you about a bad week away from disaster.
So quantity and quality seem like the two vectors to that topic, too.
– Tim
Sign up below to get Unqualified Opinions in your inbox.
The information, opinions, and views presented in this publication are provided solely for general informational and educational purposes. They are of a general nature, have not been tailored to the specific circumstances of any individual or entity, and do not constitute a comprehensive statement of the matters discussed. This material should not be interpreted or relied upon as investment, legal, tax, accounting, regulatory, or other professional advice, and nothing in this publication is intended to be or should be construed as such. You should obtain advice from your own professional advisors regarding the applicability of the information to your particular circumstances.
The views and analyses expressed are those of the author and do not necessarily represent or reflect the views, opinions, policies, or positions of Permanent Equity Management, LLC, its officers, directors, employees, affiliates, or portfolio companies, or of any person or entity with whom the author may be affiliated. Permanent Equity Management, LLC makes no representation or warranty, express or implied, as to the accuracy, completeness, timeliness, or suitability of the information contained herein and expressly disclaims any liability for errors or omissions.
This publication is not, and should not be construed as, an offer to sell, a solicitation of an offer to buy, or a recommendation of any security, financial instrument, or other product. It does not form the basis of any contract and does not create a fiduciary, advisory, or client relationship with Permanent Equity Management, LLC. Any examples or references to third-party content are for illustrative purposes only and do not constitute an endorsement. Permanent Equity Management, LLC is not responsible for the availability, accuracy, or content of third-party materials. Past performance is not indicative of future results. Any forward-looking statements are inherently uncertain and subject to change.
