This year and last year, American Environmental Partners Inc. Chairman and CEO Brad Domitrovitsch says there has been a lot of talk about risk, but less about what exactly that means.
"A lot of people really don't quantify risk," Domitrovitsch said at this year's Pittsburgh Smart Business Dealmakers Conference. "They just say, it's risky out there, interest rates go up. For us, what we've been seeing is, No. 1, people not willing to accept the risk that they used to. And No. 2, a lot of counterparty risk. That was a term that came about in '07, '08, and you didn't know who your partner was — what they were holding, or not holding. In environments like that, it translates for us into credit being lessened, interest rates being higher, duration being shorter. So, people just aren't willing to hold the baggage that they used to."
Domitrovitsch says he found a water company back in 2011 and was in the process of getting a patent — a process that was supposed to take two to three years, but instead took six. Something he had to consider during that wait was how to get value for shareholders while waiting and developing. He chose to create a strategy to bring in more investment.
"We had come up with the idea at the time, back in 2016, while we're sitting here and waiting, we're going to grab an OTC company with pretty much nothing going on," he says. "We're going to take advantage of capital markets, and we're going to go out, do a round or two and start acquiring businesses that bolt on well to where we're at in environmental services."
He says they closed that transaction in 90 days from start to finish, cleaning up issues, restructuring the balance sheet and raising capital while they were doing it. Fast forward to 2021, they started an acquisition spree during which they closed one acquisition every 90 days with a deal team that was little more than two people, and that built the company into what it is today.
"Honestly, we didn't care about interest rates when you can grow faster and create more value," he says. "But it pulls you back into ... there's a lot of good values to be had if you're willing to go out there and look for them and take the risk on them. And we do that every day. We're always looking at opportunity."
To finance deals, he says they use a creative mix as some people demand more cash, some people hold paper. And he says they have their equity as currency.
"We find ways to leverage those tools to create an advantageous outcome, no matter what the interest rate is," Domitrovitsch says. "You're talking about different types of businesses and industries, and if you tie yourself to hard assets in real estate, you're a lot more sensitive to interest rates. When you're high growth, service oriented, and you're in the mezz debt space anyway. When they're coming in at 18 to 24 percent, is 25 going to be the number that breaks the camel's back? Probably not. So, we just stick to creativity to get it done."
However, he says he tries to stay away from anything that's convertible. He says when he first took over the public company, it had a mess of debt that was aged, unpaid and all convertible. It required finding someone on the other end willing to convert it out, which was a challenge.
"Now, the more equity or owner paper a seller is willing to hold, it shows us exactly how confident they are in themselves and what they've built," he says. "If they just want one big check, it's a red flag. Unless they're 80 years old and Warren Buffett, then it's OK."
Ultimately, he says no matter the interest rate, there's always a deal out there.
"Throughout the course of history, we've always seemed to have events, but yet M&A still gets done," Domitrovitsch says. "So, there's a good opportunity out there, if you look hard enough."
