What Is A Private Equity Firm’s Ideal Deal Size?

By Generational Equity


This week we are going to be analyzing recent data compiled and released by PitchBook in their 2nd Quarter 2014 U.S. Private Equity Breakdown. Co-sponsored by NewStar Financial and Merrill DataSite, the PitchBook PE Breakdown has become the standard in private-equity-based M&A research. PitchBook is the leading research organization tracking venture capital and private equity firms. Their data is second to none for tracking the activity of professional investors, so this week we will examine several key facets of the findings so far this year.

One of the most important data sets they track every quarter is the size of private equity transactions. This is always surprising to business owners that we work with and meet at our M&A conferences. Because of the focus of the business media on larger deals, owners are quite often under the assumption that equity firms ONLY invest in large companies. The PitchBook data about deal size always refutes that assumption:

As you can see, a significant majority of deals closed by PE firms in the first quarter of this year were below $100 million in value. Even more surprising, more than 40% of all transactions were valued BELOW $25 million. Think about that for a second. This data suggests that there is a whole cadre of professional buyers that focus their attention on acquiring small, privately held companies.

This is how PitchBook describes the situation:

“The last few years have seen a clear trend toward smaller transactions for PE investors, due in large part to a significant increase in add-ons and minority deals. Those two deal types represented 66% of overall deal activity in the first quarter, continuing an upward trend over the combined 61% in 2013 and 57% in 2012.”

In our next article we will dive deeper into this add-on phenomenon and its impact on PE firms. The key takeaway I want to leave you for now is this:

Equity firms – despite what you hear in the media – love to invest in smaller, privately held companies.

Some of you might be asking the logical question of why? Quite simple: post-transaction integration. From a seller’s viewpoint, getting the deal done is the greatest challenge. From a buyer’s or investor’s outlook, it is quite different – successful post-acquisition integration is the real hurdle. Most deals that ultimately fail do so not because of a bad transaction, but usually because after the deal closes, the integration of the new asset into an existing portfolio goes poorly.

So professional buyers have learned (the hard way, in many cases) that the chances of post-transaction success go up dramatically as the size of the deal goes down. It is easier to work through all the post-closing issues with a $20 million company compared to a $200 million company or certainly a $2 billion one.

But this is just one reason why equity firms value small deals highly. To learn more, attend a complimentary Generational Equity M&A conference. Our seminar leaders have decades of experience in educating small businesses about how and when to exit for the most profit (and how to do so with an optimal buyer).

Special thanks to the research team with PitchBook for compiling enlightening data once again.