Private Equity Demand for Middle Market Businesses Keeps Growing

By Generational Equity


One of the most important buyer groups for business owners to consider approaching when marketing their companies is private equity (PE) firms. Quite often when we poll attendees at our exit planning conferences, PE firms are way down on the list of potential buyers. Since most visitors at our meetings are there to learn all about the M&A process and active buyers, it makes sense that this key group of buyers is largely unknown at the outset of our conferences.

Yet according to recent data from PitchBook, the private equity market is a key segment of potential buyers that business owners need to be aware of:

Middle-market PE activity in the U.S. continued unabated in 3Q, with $233 billion invested through 1,652 deals so far this year. High company valuations and a mountain of PE dry powder are playing an important role. Combined with a lack of quality companies on the market, those factors allow many businesses to see what kinds of prices they can fetch when they do test the waters, and more often today those high asking prices are being met.

A couple of key takeaways from this PitchBook analysis are important. First, clearly private equity firms in the middle market are quite active (the definition of the middle market is elusive and varies from source to source – for our purposes we define it as deals valued below $150 million). We have seen a gradual increase in PE interest in our deals too, growing since the end of the recession to peak levels this year. In fact, based on deal activity thus far, we anticipate that 2017 will be another record year for Generational Equity and PE buyers.

Secondly, a number of factors are converging to create this current “seller’s market” not only for PE but for all buyers. Dry powder, as mentioned above, refers to the level of committed capital on the sidelines with equity firms waiting to be invested. As you can imagine, this has grown dramatically over the past five years as more and more investors are hoping to earn the tremendous returns available in funds that invest in privately held companies.

On top of this, although not mentioned in the PitchBook analysis, is the reality that interest rates, despite recent increases, remain at record low levels when compared to historic norms. Since a significant portion of all deals, but especially deals relating to private equity firms involve some component of financing, the fact that interest rates are still low is a compelling driver of deal demand.

But the Real Issue for Private Equity Firms is…

Finally, from a private equity standpoint, the only real dampening factor impacting this market is the simple fact that there are not enough quality deals for them to look at to make acquisition plans. Now the term “quality” can connote many different things from PE firm to PE firm. For some, quality deals mean business targets that meet minimum revenue/earnings thresholds. Others have growth criteria, and many have industry-specific benchmarks that must be met. But no matter which definition of terms you use, there simply are not enough businesses in the market presently for equity firms to analyze for investment purposes.

Keep in mind that in order to narrow their options down to 2-3 viable targets annually, many equity firms will review hundreds (in some cases thousands) of companies before they make any indications of interest. Ultimately what this means to business owners is that they are quite literally missing out on potential opportunities to sell their company for the maximum value, opportunities that may not be available again in quite some time.

If private equity activity is news to you and you would like to learn more, you should set aside some time to attend a Generational Equity exit planning conference. While there you will not only learn about PE firms as buyers, you will be introduced to a full selection of buyers that are active and how you can determine which set of buyers is optimal for you and your firm.

To find out when we will be in your area next, please reach out to us at 972-232-1121 or use our website to provide us with your contact information and we will be in touch.

Bottom line: When you do eventually reach a decision to exit your firm, do so in a planned, thoughtful way and be sure to be aware of all potential buyer types that are active in the current seller’s market.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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