One of the most interesting buyer groups that we introduce to the attendees of our exit planning conferences are Private Equity Firms (PE). Over the years, more and more PE firms have migrated into lower middle market transactions (those companies typically valued below $50 million). By doing so, they have begun to compete head-to-head with strategic buyers for companies.
For those of you interested in learning more about how PE funds operate in the lower middle market, The American Investment Council created a really nice piece that gives you a good overview:
In a nutshell, as opposed to the mega funds that get all the press, PE firms in the lower middle market invest in privately held companies for one reason: To help them grow! By doing this, PE firms earn an internal rate of return which they then provide to their limited partners (for example, pension funds).
According to Bain's Global Private Equity Report 2019, PE funds continue to attract quite a few investors:
Source: Bain & Company
For those of you unfamiliar with the term, “dry powder” refers to committed capital on the part of limited partners that has been promised to equity firms to use when they target acquisitions. As you can see, we are at a record high globally with $2 trillion in dry powder available. And the biggest component of dry powder holders are “buyout” funds, the types of funds that focus on investing in privately held companies.
So why do limited partners, who have very strict returns that they expect to achieve, continue to invest in PE funds in record numbers? Because of the earnings these businesses can achieve. Again, according to Bain’s report:
Source: Bain & Company
As you can see, in every time interval analyzed, PE outperformed the S&P 500 and, in some cases, substantially. This is why limited partners are pouring record amounts of capital into these funds.
But the really good news for owners of privately held companies today is that a substantial percentage of the record amount of dry powder, according to Bain, is in the prime investing years for the funds:
Source: Bain & Company
You see, most funds have a 5-7 year window in which they have to invest the capital or return it to their limited partners. Obviously returning the investment is not a good scenario because the partners end up with very little return and the equity fund gains a poor reputation in the market.
Right now about 60% of the funds are aged less than two years, that means in the next few years a substantial amount of that capital will have to be invested in well-run, privately held companies.
Great news if you own one of these potential targets!
So, how do you attract one of these PE firms? And, more importantly, how do you determine if your company is even a good fit for a PE firm?
Hire an experienced investment bank to guide and counsel you!
Fortunately Generational Equity and our team of industry leading valuation and deal making professionals is here to help. There is a reason our firm has been named Valuation Firm of the Year twice and Investment Banking Firm of the Year three times in a row:
Don’t just take my word for it, listen to what our clients say about our services:
Now the reality is, not all companies meet the criteria of PE firm targets. They usually have very specific items they are looking for based on revenue, EBITDA, location, industry, and management team synergy. But, the only way you will really find out if your company is a match is to hire a qualified firm to represent you and help find the optimal buyer for your business.
“Optimal” is the key word in that sentence. The optimal buyer for your business will be one that not only presents a premium offer but also structures the transaction to match your personal financial needs. (Hint: 100% all cash deals may not always be optimal).
And then there is the intangible: Do you feel comfortable with the buyer’s plans for your business? Will they maintain and grow your legacy?
All of these items are important and it is usually the latter ones that end up mattering the most to you the seller. Our dealmakers understand this and specialize in creating transactions that are best for you.
Interested in learning more about Generational Group and all the buyers out there? Call us at 972-232-1121, or visit our website, provide us with your contact info, and we will be in touch.
And remember we are in the midst of one of the strongest seller’s markets in ages, PE firms are just one piece of that pie!
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2019 Generational Equity, LLC. All Rights Reserved.
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 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.
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
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
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
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
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
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
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
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
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
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 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.
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
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
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
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
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
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
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.
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