Private Equity Activity – What It Means For You
Over the past decade, private equity has begun to play an ever more critical part in our economic health. In the past, too much attention has been given to the billion-dollar mega deals that were financed with excessive leverage.
The reality is that the vast majority of equity firms provide financing for one critical reason: to help businesses grow. Investors place their trust in equity fund managers because they have confidence that the return they earn will exceed what they can receive in other investment vehicles. And over time this has proven to be true.
As we have discussed before, a significant number of pension funds for example have continued to expand the percentage of funds that they invest in private equity firms. The following chart from Pitchbook shows you why:
Source: The Pitchbook Decade Report – 2001-2010
According to Pitchbook – an independent and impartial research firm dedicated to providing premium data, news and analysis to the private equity industry – these are the 20 most active private equity groups in operation during the past 10 years. As a group, they have averaged 139 acquisitions during the past decade, which calculates to an average of 14 per year.
And what types of companies do private equity firms look for? For the past decade (and many of you will be surprised to hear this) the lower middle-market has been the primary target. This segment is made up of companies valued BELOW $250 million in revenue. This is how Pitchbook describes it:
“Lower middle-market deal activity, as defined by deals valued at $250 million and below, accounted for a majority of private equity deal flow during the decade. Despite the attention given to $1 billion+ deals, these lower middle-market companies have long been the bread and butter of private equity investment, accounting for 81% of the decade’s deals. Companies in this size range will continue to be of major importance to private equity as they play to PE’s strengths of value investing, leverage and growth creation.”
I would venture to guess that not many readers knew that lower middle-market deals accounted for more than 80% of all deals closed in the past decade by private equity firms. I have been tracking this data for years and it still amazes me.
All the press is given to deals valued over a billion when in reality this group only accounts for a small percentage of deals closed by private equity firms. In fact, according to Pitchbook, deals valued over a billion dollars in size only represented 4% of all deals closed during the past decade!
Key Takeaways
What does this mean to you as the owner of a lower middle-market company? A couple of things come to mind. First, you need to be aware that equity firms are quite active right now looking for add-ons to their current portfolios. An add-on is an acquisition that an equity firm makes that is bolted on or added on to an existing portfolio company.
As we have discussed before, equity firms are sitting on an estimated $400 billion in committed capital, about half of which needs to be invested in the next two years or so. Most of these funds will be used to acquire/invest in lower middle-market companies as add-ons to current portfolios. You might be surprised to learn about equity firms that are actively doing so right now in your industry.
Secondly, if you are interested in staying with your company post-sale to help it achieve greater levels of revenue and profitability, partnering with an equity firm may be the best option for you. We have examined this idea before, indicating that in many cases equity firms that specialize in investing in lower middle-market companies do so in the structure of a “partial sale.” A partial sale allows you to retain a minority interest in the company and participate in a second liquidity event later when a much larger entity is sold or taken public. If you would like more information on how a partial sale works, please click here.
Of course not every lower middle-market company is a target for an equity firm. These professional buyers are looking for specific types of companies in pre-determined industries. They also usually have size requirements for revenue and profitability. However, for add-ons, many of these firms wave their size requirements, as they are more interested in synergies and potential growth.
If you would like to learn more about equity firms and their interest in lower middle-market companies, I would invite you to attend one of Generational Equity’s free informational workshops about how and when to exit your business for the most profit. While there you will be able to not only learn a significant amount about how to find optimal buyers for your company, you will also be able to meet one-on-one with a Generational Equity M&A advisor who can discuss your company and your exit planning goals. The few hours you invest by attending could be the best use of your time in years. Please click here to find out if you qualify to attend.
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