As we have discussed before, according to a number of sources, equity firms are currently sitting on a significant amount of capital. For example, based on Pitchbook’s 1st Quarter 2012 Private Equity Update, at the end of last year, the cumulative total overhang was at $425 billion. You can see this graphically below.
Pitchbook is one of the leading analytical firms tracking the private equity and venture capital industry. As you can see, because of the significant fund raising in 2007 and 2008 coupled with the lack of investing in the recessionary year of 2009 and the following recovery, the overhang (also known as dry powder) has remained very high.
According to other analysts, it is actually higher than Pitchbook’s estimate. For example, the Turnaround Management Association’s online publication pegs the overhang at approximately $477 billion. The author of the article on the TMA website,Ted Koenig of Monroe Capital LLC, went on to say:
“The current overhang is unsustainable, given the nature of private-equity fund structures; firms lose the ability to invest this capital once their investment period runs out. At today’s deal flow pace, it would take around five years to invest the current overhang, which means that private-equity firms must start investing now at a much higher rate if they want to invest their full fund (and collect the fees and carry on those remaining commitments). These private-equity firms will try their hardest to put this capital to use, which should result in a plethora of M&A activity.”
I have highlighted the end of that section to emphasize a point: During the next 12-24 months, equity firms are going to be quite active in looking for and acquiring companies.
Since the appetite for mega deals has cooled, what do you think they will be looking for? Primarily this: add-on companies to existing platforms. Keep in mind that many of these platform companies were acquired prior to the Great Recession hitting in 2009. As we saw a few days ago, add-ons as a percentage of deals closed grew to 50% of all deals equity firms invested in last year. And according to Pitchbook’s latest data, in the first quarter of this year, add-ons broke the 50% barrier for the first time ever, reaching 54% of all deals that they closed.
This is great news if you own a business today. If you are profitable (and we assume you must be if you survived the recession) and growing and are in an industry that has active equity firms, you could be a prime target for a professional investment firm.
The only caveat I would give you is that since these buyers look at hundreds (in some cases thousands) of deals every year, getting your investment opportunity in front of the right person, in the proper format, at an appropriate investment firm is critical. To do this effectively, you will most likely need professional help.
If you would like to learn more about how to approach these types of buyers, I would suggest that your first step would be attending one of Generational Equity’s educational M&A workshops. We hold these around the country because we are dedicated to introducing business owners to the vital concept of how and when to exit your business for the most profit.
For many of you, nearly your entire net worth is tied up in your business. You owe it to yourself, your family members, and your employees to ensure that you exit when you want to, not when external circumstances force you to.
If you would like to find out if the conference would be a good fit for your business, one of our M&A professionals can contact you at your convenience.
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
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