InSight

Exit and Growth Strategies for Middle Market Businesses

Private Equity – Sellers in the Driver’s Seat

By Catherine Patience | May 17, 2016

Sellers in the Driver's SeatIn a sluggish unpredictable economy with volatile stock and bond markets, investors continue to rely on Private Equity investments as a safe haven for their dollars.  Recent PE returns have surpassed expectations, so continuing to raise new capital has not been an issue for Private Equity Groups (PEGs).  In fact, in the first quarter of 2016, fundraising in the private equity markets was up 14% over the same period last year.  With new capital sitting on the sidelines, Private Equity must now seek out solid companies to buy, decide what they’re worth and hope they can seal the deal before another investor beats them to it.

Deal sourcing has been a challenge for the past several years.  PEGs have wrestled with two investment approaches: “overspending” for larger or best in class companies vs. purchasing smaller, lower quality companies at lower multiples and then devoting significant time and resources to rebuild and grow.  Statistics tell us that given a choice, PEGs would prefer do the former, but in many cases are forced to do the latter. Smaller transactions, or Add-Ons (to existing base portfolio companies), represented nearly 70% of all private equity transactions in the first quarter of this year, a continuing upward trend.

In addition, PEGs continue to face stiff competition for quality deals from strategic buyers looking to grow by acquisition.  Many PEGs are willing to offer incentives to selling companies, like a quicker close, to gain an advantage in the auction process. The current competitive environment has put sellers in the driver’s seat.  As long as value expectations are realistic, this may be a very good time to be selling a middle market business.

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