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The Private Equity Overhang

By Generational Equity

the pe overhang

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.

What This Means for Business Owners

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.

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Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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Robert Evans, President and CEO of Mealtracker Dietary Software
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Dear Chris and Andre, I just wanted to say thanks for all your help. Even though this process was not an easy one, it was comforting to know that I had a capable team standing beside me. You made me feel like we were almost your only client or at least the most important one. Thanks again, and I will recommend your service in the future.
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Karen S. Williams, CFO, BW Manufacturing
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Terry D. Wickman, President, Keytroller
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Michael J Polarek, President, Paragon Packaging
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Jay Dinnison, Owner of Sharpe Mixers
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Ralph Noblin, President of Noblin & Associates
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Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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.
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Jay Dinnison, Owner of Sharpe Mixers
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Karen S. Williams, CFO, BW Manufacturing
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Bryan D. Horn, Owner, Over Under Clothing
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Andy Graham, Vice President, Modern Heating & Plumbing
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.
Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
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Michael J Polarek, President, Paragon Packaging
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Andy Graham, Vice President, Modern Heating & Plumbing
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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
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Bil MacLeslie, CEO, ipHouse