The title of the article in Mergers & Acquisitions magazine caught my attention for several reasons:
It may surprise you to learn that a private equity firm (PE) that manages to escape the mainstream media headlines has just completed its 100th acquisition. Although this is a significant milestone and one that should be celebrated, Clearview is not in the minority when it comes to acquisition activity like this. In fact, Clearview is one of the literally hundreds of equity firms that are quite active right now, especially those who are focused on the “lower middle-market.” Hence the latter portion of the title: the lower middle-market is percolating.
An appropriate choice of words. The reason PE firms like Clearview are active, and the market is percolating is because firms are using the current market (relatively low interest rates, significant capital overhang, and economic growth) to acquire “add-on” opportunities for their platform companies.
This is exactly what Clearview did with its milestone acquisition, according to Mergers & Acquisitions:
Clearview Capital, a lower-middle market private equity firm in Old Greenwich, Connecticut, has completed its 100th transaction with one of its portfolio companies acquiring F1 Discovery LLC, which provides electronic discovery services to law firms and corporations.
Clearview Capital’s Xact Data will expand in the West Coast with the addition of F1, which is based in San Francisco.
A couple of things can be inferred from this paragraph. First, Xact Data is being “added on to” via this acquisition because it is a good synergistic fit. According to Clearview’s website, “Xact Data Discovery (XACT) provides streamlined forensic collection, processing, hosting, document review and project management services, representing an end-to-end solution to support its clients throughout the litigation discovery process.” When acquired in January of 2015, the company had 16 locations in 11 states and is headquartered in Mission, Kansas.
Again, according to the Clearview website:
Management is pursuing an aggressive growth strategy including opening new offices as well as making add-on acquisitions to expand its market presence and add new service capabilities.
The acquisition in May of F1 Discovery enabled XACT to enter a new geographic market, allowing it access to legal firms on the west coast, a lucrative market. In fact, F1 Discovery is the second add-on acquisition that Clearview has made on behalf of XACT. In January of this year it also acquired Orange Legal Technologies, “a rapidly growing provider of specialized electronic discovery (“eDiscovery”) and outsourced managed review services, based in Salt Lake City, Utah.”
Clearly Clearview, via XACT, is aggressively pursuing add-on targets in this specialized industry niche. But this is just one example of a PE firm doing this today. As we have examined in the past, we are truly in a seller’s market, especially for companies that operate in the lower middle-market (which Clearview defines as being companies with EBITDA – earnings before interest, taxes, depreciation and amortization – below $10 million). However, as with most lower middle-market firms, that criteria usually only applies to their initial investment in an industry; add-on transactions can be much smaller. This is how Clearview describes their strategy regarding add-ons:
Clearview has pursued add-on acquisitions for the majority of its platform investments and has completed more than 50 such transactions since Clearview’s founding in 1999. Add-on investments allow our platform companies to diversify geographically, acquire new products or capabilities and serve as growth engines for our businesses. While we typically require a minimum size and profitability for our initial investment in a platform company, we will consider add-on acquisitions of any size and situation.
When we introduce the concept of a private equity firm acquiring a small, privately held company as a bolt-on acquisition at our M&A conferences, most attendees are surprised It seems that the business press has focused so much on huge, billion-dollar equity firm acquisitions over the years, that the idea of a firm specializing in smaller acquisitions is completely foreign. But as you can see above, half of Clearview’s acquisitions have been in the form of add-ons!
The reality is Clearview is one of many PE firms pursuing this growth strategy right now and this is why the lower middle-market, as they put it, is “percolating.”
How do we know that firms like Clearview are acquiring and what they are after? Because we work with them regularly and they tell us what they are looking for in terms of add-on strategies.
In fact, a few years ago, we sold our client, Wheatland Systems, Inc. as an add-on to Clearview’s platform company, EN Engineering, LLC. And a few years later, in 2012, Clearview sold the much larger entity that EN Engineering became to CIVC Partners. At that time, James G. Andersen, co-Managing Partner of Clearview Capital stated:
“Throughout the period of our ownership of ENE, the company’s management team did a terrific job building the business organically and through acquisition. ENE is a world-class business and we are proud to have had the opportunity topartner with its management team and help the company through a phase of rapid growth.”
In conclusion, the statement from Mr. Anderson above sums up why partnering with a firm like Clearview as an add-on makes so much sense: They truly work in conjunction with their holdings in order to aid them in their future growth.
As we all know, most privately held companies are woefully under-capitalized. Business owners usually have great ideas for growth; they simply lack the funding to bring their concepts to fruition. Equity firms like Clearview can come in and make those dreams become reality, and, while doing so, help existing management participate in a future liquidity event, just like EN Engineering did in 2012.
Interested in learning more and finding out if your company might be a good fit for an equity firm investment? A great place to start is by attending a Generational Equity exit planning conference. While there you will be able to meet one-on-one with our Advisors who can delve into your particular business model and give you input on a variety of buyer types that are active in today’s seller’s market.
Special thanks to PE firms like Clearview Capital that do such an outstanding job of helping entrepreneurs achieve their dreams and along the way help our economy to grow. To find out more about how PE firms like Clearview operate, follow this link to the Private Equity Growth Capital Council.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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