InSight

Exit and Growth Strategies for Middle Market Businesses

Private Equity Deal Flow

By Catherine Patience | Oct 09, 2015

Private Equity Deal FlowAccording to AARP, 8,000 people a day are turning 65. That’s over 40 million baby boomers hitting retirement age between now and 2029. Recent U.S. Bureau of Labor statistics confirms that approximately 13% of the U.S. work-force own businesses. Even a conservative estimate of the number of businesses that will change hands as the boomer population retires over the next fourteen years puts the number in excess of 4 million. The looming question is, as the “for sale” signs go up on those businesses, will there be sufficient capital resources and private equity deal flow for everyone to “cash out?”

For that reason, we keep a keen eye on capital resources. Private Equity investors are a huge source of investment capital. So, how is private equity faring this year? As we finish the first half of 2015, investment is down 7.1% from Q1 to Q2, and down 20% from Q4 2014. In this highly competitive market the number of quality investment targets has shrunk. The higher the quality, the higher the multiple, so many Private Equity Groups (PEGs) are finding it harder to find quality companies in their price range. To compensate, PEGs are looking to middle-market sized companies with slightly lower multiples. But even those “add-ons” are at the lowest levels we’ve seen since 2013.

With only a few large transactions to bump up average deal size, the upper and core middle market size companies comprise the majority of deals done year to date. Private equity investors have been shedding holdings at a fast clip, with corporate buyers having already spent about $160 billion, just $7 billion short of last year’s total.

53% of the $75.6 billion capital raised year-to-date has gone into the $1 billion – $5 billion size funds. This is likely due to PE portfolio consolidation and a trend toward larger fund managers. Confidence in larger firms is also expressed by a drop in average fund closing time.

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