Many business owners have a deep-seated concern for the future of their business even after they have sold it. They hope it will grow and flourish and the employees will remain gainfully employed so they can continue to provide for their families. Business owners should be aware of a few facts about private equity and the businesses they back:
- Current market conditions with Covid19, have caught the attention of traditional PE fund managers due to the dislocation in credit markets and the investment returns they could provide. With dry powder still on the sidelines, PE fund managers are looking closely at how to invest in distressed assets to enhance returns. For fund managers who already have a credit strategy, markdowns of current portfolios are likely; however, these managers are well positioned to identify, execute and operationalize new investment decisions to enhance portfolio returns. 1,384 PE deals closed in Q1 2020 for a combined $186.4 billion—YoY gains of 7.3% and 6.0%, respectively. These figures were boosted by deals that had been negotiated before COVID-19’s effects on the US economy were felt. For example, the largest deal to close in the quarter was announced in May 2019.
- US PE deal activity topped 5,000 deals and two-thirds of a trillion dollars in 2019. Despite year-end figures falling lightly short of 2018’s mammoth $730.3 billion deal value, we believe the industry remains strong and that a minor YoY dip is not indicative of a pullback in PE dealmaking. PE activity comes in uneven spurts; deal value fell in 2015 before posting a significantly higher sum in 2016.
- At the start of Q3 2018 there was a record 3,037 private equity funds in the US for investors to choose from, targeting an aggregate $948 billion US dollars.
- The dry powder of global private equity companies amounted to over $1 trillion US dollars at the end of 2017 with $961.5 billion to private equity and $145.4 billion allotted to venture capital.
- 921 private equity funds reached a final close, securing just over $453 billion US dollars in 2017, the largest amount of capital raised in any year.
- As price-to-EBITDA multiples paid in the private markets converge with valuations in the public markets, more public companies become potential take-private targets. The total value of these buyouts surged to $180 billion US dollars in 2017, nearly twice the level of the year before.
Based on many years’ experience we have seen this first hand and we believe this is due to several key ingredients brought together under private equity investment. These include a typical focus on organic growth rather than the often wrongly assumed cost cutting measures. Simply reducing the overhead expenses of a business certainly will not allow it to grow and may reduce its position in the market and more importantly reduce its value.
Typically private equity will invest significant capital in a business where an individual owner is simply unable or unwilling to do so. Private equity usually has gained a broader range of experience in various businesses and industries to draw on over an individual owner who has a more narrow experience base even though they may have a deep knowledge of their own business operations. Private equity also typically has a very extensive talent pool of experienced individuals from which to call upon.
* Selected data from Pitchbook quarterly reports