The State of Private Equity and Why It Wants Your Business

By Generational Equity


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:

Private Equity Figures

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:

Private Equity Figures

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:

Private Equity Figures

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:

Our system works!

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.

© 2021 Generational Equity, LLC. All Rights Reserved.