Private Equity Investors – Why They Remain Loyal to Funds
We recently posted an article demonstrating how active leading equity funds have been over the past decade. As you’ll recall, as a group, these 20 firms on average acquired nearly 14 companies per year during the ten years running from 2001 through 2010. Of course none of this would be possible were it not for investors who are willing to commit capital for equity funds to use. So the questions are will this continue and if so, why?
According to a recent survey by Coller Capital published in PE Hub, despite (or quite possibly because of) economic uncertainty, “a strong majority of limited partners plan to continue their steadfast commitments to private equity, with 83 percent saying they will maintain or increase their allocations to the asset class in the coming year.”
The Coller Capital Barometer
Coller Capital is the leading global investor in private equity’s secondary market – or “secondaries” as it is usually known. Secondaries refers to the purchase of original investors’ stakes in private equity funds and portfolios of direct investments in companies.
Since 2004, the Coller Global Private Equity Barometer has been a unique, semi-annual snapshot of the plans and opinions of private equity investors worldwide. Each Barometer captures the views of more than 100 private equity investors to provide a representative sample of investors worldwide.
This latest survey asked detailed questions of 107 limited partners, including public and private pensions, insurance companies, endowments, foundations, and family offices. Two-fifths of the limited partners were from North America; another two-fifths were in Europe, and one-fifth were in Asia. Forty percent of respondents managed at least $10 billion in assets. So, as you can see, this survey is a nice sampling of key investors in private equity.
North American Investors are Positive Regarding 2012
The Coller Barometer also found that “68 percent of North American investors in the survey believe that 2012 will be a ‘good’ or ‘excellent’ vintage year for private equity.” This means that investors believe that the funds they invest in will be quite active in 2012 acquiring companies and managing their growth so that over time the investors will earn a significant return.
According to Jonathan Gutstein, a partner at Coller:
“Investors see considerable challenges out there, but they are optimistic. At the core, there is a belief in private equity as an asset class.”
Middle-Market Funds Are Popular
One piece of the survey we found quite fascinating. It is the continued emphasis on the part of investors in funds that focus on smaller transactions. According to the survey, “the data also reflected investors’ increasing avoidance of large buyout funds (those seeking deals of $1 billion or more) and their growing affinity for small-cap and mid-market buyout vehicles.”
As we have discussed before, more than 80% of deals closed in the past decade by private equity funds were valued below $250 million. That is substantially different than what the business press would have you believe. In fact, the middle market and the lower-middle market have both been favorite targets for equity funds and their investors for years.
Why is that? Because in most cases, the fundamentals driving smaller transactions are different than those affecting billion dollar deals (typically with excessive amounts of leverage used to close the deals). In the middle market, equity firms generally have a longer-term time horizon and typically look to partner with existing management to grow their investments. In so doing, they provide solid, dependable returns to their investors. This is what is making private equity an ever more important component of our economic future.
What This Means to You
Many business owners that we meet at our M&A workshops are surprised to hear about how active equity firms are in acquiring smaller companies. You might be amazed to learn that there may be active equity firms operating in your industry right now.
Of course not every privately held company is an appropriate target for an equity firm. However, there are a multitude of buyers active right now. The only way you can find out if your company would be a target of any optimal buyer is to do your research.
The first step would be to download our free whitepaper that discusses what truly motivates buyers. You may be surprised to learn that you have “intangible assets” that buyers will pay a premium for. To learn more, please click here and download our free whitepaper on this topic.
If after reading the whitepaper you would like to learn more about buyers and their motivations, I would invite you to attend one of Generational Equity’s free M&A workshops on the topic of how and when to exit your business for the most profit. Your investment of a few hours to attend could be the best use of your time in years. While there you will be able to meet with one of our M&A advisors one-on-one and discuss your specific situation. If you are interested in learning more, please click here.
Remember this: Pension funds and endowments are professional investors who know what they are doing. If they are expanding their allocations in private equity, they are doing so for one reason: They believe in it and its ability to produce sizable returns for them. And these returns are generated by equity firms that locate great middle-market companies to invest in.
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