Private Equity Investments
As many of you will recall, during the last election cycle, the private equity industry was discussed, examined, and, in some circles, criticized more than ever before. The reality is no industry was more vilified by outside sources with little knowledge of the key role it plays in our economy than any other over the year leading up to the election.
Even though lots of folks don’t want to admit it, no matter what political party you belong to, the truth is private equity plays a key role in the health and expansion of our economy.
This is especially true of equity firms that specialize in the lower middle-market. As we have discussed before, companies that private equity firms invest in tend to outperform their peers in many categories, including the much-discussed area of job growth.
The importance private equity investments play in our economy was highlighted in a Pitchbook report released last month. Entitled the “4Q 2012 Private Equity Company Inventory Report,” it provides some interesting details about private equity investments. Pitchbook is the leading research firm for private equity and venture capital information.
Several pieces of data caught my attention. First, the following chart highlights just how the influence of private equity investments has grown during the past several years.
A couple of things stand out in this chart. First, the number of private equity investments has grown dramatically. In fact, the number of businesses invested in has grown more than 186% since 2004. That is significant growth over these 8 years.
Secondly, as you can see, a significant portion of these private equity investments is prior to 2008. This indicates that equity firms are holding on to their companies for a significant amount of time, which flies in the face of those that claim equity firms acquire companies to sell off the assets quickly.
This is really good news for business owners that are looking for partners to grow their businesses. As we have learned before, a partial sale can be a real win-win for business owners and equity firms.
The Lower Middle-Market
Another important component of Pitchbook’s analysis of private equity investments is the size of company that these firms concentrate on. As we have discussed in previous posts, historically data has shown that smaller companies - rather than larger firms - are the focus of private equity firms. The following data from Pitchbook also supports this thesis:
Private Equity Investments by Deal Size
As this chart highlights, the lower middle-market is a prime focus of private equity investments. We define the lower middle-market as companies valued below $100 million; more than 50% of the companies that equity firms invest in fall into this range.
Even though the mega deals get all the publicity, it is clear that smaller deals are really of more interest as private equity investments. Why is this? Equity firms have learned that acquiring a number of well run, lower middle-market companies are better investments than trying to hit a home run with a single very large transaction.
Quite a few business owners that we speak with are very surprised to learn about the smaller focus of equity firms. This is just one piece of data that we examine at our M&A seminars. Chances are good that in addition to this piece of information, you will also learn quite a bit more about the M&A process and investors like equity firms.
If you would like to learn more about our seminars or our services, please click here and provide us with your contact info and we will be in touch. Or you can call 877-213-1792 and talk with one of our M&A professionals about your business and investment opportunities.
Bottom line: If you are considering the sale of your company, be sure to consider the concept of a private equity investment in your business. As we have seen, it is a critical and growing part of the investment landscape.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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