For a long, long time private equity received far more than its fair share of negative publicity. We see this with nearly every M&A summit we host – Business owners predominately shun PE buyers because of the negative view that equity firms acquire businesses to either consolidate (cut jobs), reduce expenses (cut jobs) and/or break companies up and sell the pieces.
Certainly history is littered with the scenarios described above. However, since mega PE transactions get nearly all the press, it is clear that the view of these professional buyers is very skewed.
In fact, we have found over the years that private equity firms that specialize in acquiring middle-market (and even lower middle-market) companies have a different game plan in mind. Rather than buy and break, they buy and build. Instead of simply using financial engineering to reduce costs/overhead, they bring managerial skills, marketing and sales experience, and operational expertise to take a smaller company (when combined with an existing platform company) from sales and profits of X to X2.
To help educate business owners, the press, and the general public about how equity firms operate in the middle market, the private equity community has created a wonderful interactive research tool, growtheconomy.org.
According to the site, “Growth Economy is a dynamic research database that matches data from two independent sources to track a key driver of the US economy: How private equity-backed companies compare to other U.S. businesses on jobs and sales growth. This powerful research tool is made possible through a partnership between the Association for Corporate Growth (ACG), PitchBook Data, Inc., and the Business Dynamics Research Consortium at the University of Wisconsin-Extension.”
Here is some remarkable data from the site:
Even after the worst recession since the Great Depression, the United States continued to see job and sales growth in nearly every Congressional district because of private equity. The data provided by GrowthEconomy.org shows how private equity investment is the leading driver of jobs sales growth in the middle market.
From 1995 through 2013, U.S. private equity backed companies grew jobs by 83.7 percent while all other U.S. companies grew jobs by 27 percent. Well over three-quarters of this growth comes from the middle market.
From 1995 through 2013, private equity backed companies grew sales by 134 percent, while the United States grew sales by 31 percent. More than three-quarters of this growth comes from the middle market.
OK, I just threw a bunch of data at you, so let’s break it down to a few key points.
First, note the date ranges that the research groups used: 1995-2013. This range includes the deepest, longest, darkest recession since the Great Depression. They didn’t cherry pick their dates by only looking post Great Recession, they included it. Given this fact, the data in the two paragraphs above is remarkable.
Secondly, the termination point of their research was 2013. The last two years have seen even more dramatic growth in job creation and sales growth. I am sure that when they update their data in a couple of years, and include the solid growth years of 2014 and 2015, that the private equity numbers will be even more impressive.
But what is really interesting about the site is that not only do they look at this data on a national level, they also provide research by state, which is enlightening. I have randomly picked a few states for your perusal:
Just barely below Massachusetts, New York and California in terms of deal flow, Texas saw 5,825 private capital investments between 2003 and 2014, for a total value of $435.4 billion. There are 4,025 Texas companies still backed by private capital. The 497 private equity firms based in the state completed a considerable 1,677 of the total number of transactions.
The most active state for private investment, California saw close to 24,000 transactions close between 2003 and 2014, accounting for an immense $436 billion in total capital invested. Nearly 2,600 investors call California home, and they have made close to 13,400 deals in the state in that same timeframe; more than 12,000 companies are backed by private investors.
Those are some impressive numbers. I have bolded what is most telling: the sheer number of companies in both states that are still backed by private equity. I bet that business owners in these states would have no idea that more than 4K companies in Texas and 12K in California are currently PE-backed. Chances are good you may have competitors/suppliers/customers that are backed by PE and you are not even aware of it.
Lest you say, “OK, you picked two of the largest states in the country so the data is skewed,” I will now randomly look at a couple of smaller states:
Oregon saw 780 deals completed by private capital investors worth a total of $16 billion in capital invested between 2003 and 2014. Four hundred ninety-six Oregon-based companies are still privately backed. Forty-seven firms are based in the state and were responsible for 150 of those 780 investments.
Standing at 815, Missouri’s tally of investments made by private capital firms between 2003 and 2014 brought in a hefty $29.7 billion. Five hundred seventy-nine Missouri-based businesses are still backed by private capital. Eighty-nine private investors are also headquartered in the state; of those 815 deals, they completed 221.
Between 2003 and 2014, private capital investors completed 1,882 deals worth a total $108.7 billion in Georgia. Private capital investors have backed 1,311 companies in the state. One hundred fifty investors are located within the state and they made 331 local investments throughout the same time period.
Even in states with much smaller economies we see impressive private equity tallies and investments. If you do the math, of the investments made in these three smaller states, 64% are still backed by private investors in Oregon, 71% in Missouri, and 70% in Georgia.
Look at how your state has performed and how many companies are backed by PE at growtheconomy.org.
If you drill further into the data on each state (and the links I have provided you above will allow you to do that), you will see that across-the-board job and sales growth by companies backed by equity funding has far outpaced each state’s growth throughout the time frame examined, so this data is not a fluke. You can clearly see that firms that focus on middle-market sized companies do so to help them grow, expand, and become more successful. Keep in mind that for many of these firms (especially family offices), the hold period for their investments can be quite long, if not permanent.
I am not suggesting that every privately held company is a prime target for an equity investor. They have specific criteria/features that they look for and if your business doesn’t have those, then they will most likely pass. However, the data proves that you can’t ignore them as possible buyers for your company.
Quite often business owners who attend our M&A conferences and become our clients are hesitant to have us approach private equity given their preceived reputation. Many want to stay on with the business after the deal closing and nearly all are concerned about the legacy of the business and its post acquisition continuity (especially for the employees).
I recently met with two of our clients post close to talk about their experiences. Both had been acquired by private equity firms and both owners have remained as equity partners and are still involved in the businesses. In each case, neither had considered private equity at the outset of our process but through the hard work of our dealmakers, both Brent Roth, owner of UST, and Brad Hennrich, owner of HESCO, came to the realization that partnering with an equity firm would help achieve their professional and financial goals.
If you are unclear about the benefits of private equity as a buyer type for your business, I strongly encourage you to attend a Generational Equity exit planning seminar. We hold these regularly throughout North America and invite specific types of companies to attend. If you are interested in learning more, please email us at email@example.com. We will reach out to you confidentially to find out more about your company, your goals, and determine if you are a good fit to attend.
And special thanks to the folks creating the research behind growtheconomy.org. The data is compelling and really sheds new light on an important segment of investors.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2015 Generational Equity, LLC. All Rights Reserved.
it all started with a conference.
start your story today,
speak directly with one of our senior advisors +1-972-232-1121
The information we learn from customers helps us personalize and continually improve your experience. Here are the types of information we gather.
We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice.
Generational Group’s affiliates are all part of one corporate family, they work with one another and may work together to provide services to you. The sharing of your information among affiliates enables Generational Group to serve you more efficiently and makes it more convenient for you to do business with Generational Group. Generational Group is permitted by law to share information with its affiliates. All of our affiliates follow similar privacy policies.
For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Group may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Group. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Group at its office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Group may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Group does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Group will be deemed NOT to be confidential. By sending Generational Group any information or material, you grant Generational Group an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Group is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Our computer system protects personal information using advanced firewall technology.
Information Generational Group publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Group intends to announce such products, programs or services in your country. Consult a Generational Group representative for information regarding the products, programs and services which may be available to you.
Generational Group makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Group web site, please understand that it is independent from Generational Group, and that Generational Group has no control over the content on that web site. In addition, a link to a non-Generational Group web site does not mean that Generational Group endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, Trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Group BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Group.
Success, you have been added to our list.