Private Equity at the Gates – A Great Opportunity for Private Companies and Owners

Today many private companies and family owned businesses are faced with the hard facts of demographics.  The baby boomer generation is entering their prime retirement years.  So, for many company Founders, family owned business CEOs and private company heads want to retire.  In many cases the struggle for capital has grown harder and the ability or willingness of their heirs makes leaving the company to them a poor option.  Yet, many of these business leaders have been more focused on running the business versus preparing to sell it.  For those businesses that have put in the effort, time, and investment in developing their Leadership, Sales and Operations, there can be several options with Private Equity (PE) acquisition, a key one for many.

In 1984, the year not the novel, there were 24 Private Equity firms.  Until a book and movie called “Barbarians at the Gate” was released, no one had even heard of private equity or a firm called KKR.  Now in 2016, when I speak to executives interested in private equity or go to a private equity conference I have a hard time keeping track.  Why? Because of ridiculously low global interest rates, huge amounts of global money chasing ever rarer double-digit returns – there are now over 6300 private equity firms.  According to The Economist, 620 were founded in 2015 alone.

So why is private equity the silent power it has become?  For one, “The funds made deals worth $400 billion in 2015.  The fees they pay each time they buy or sell a company provide a fifth of the global banking system’s revenues from mergers and acquisitions.”  Goldman, Morgan Stanley, UBS, HSBC and other major global banks now are the followers in investment.

More and more of global companies are becoming owned by private equity and removed from the global stock exchanges and the access and visibility they give to many investors.  At the same time, it gives the management of the private equity company lots of air cover to do what they believe is needed to achieve the returns needed by taking the actions required expediently without exposure to quarterly driven markets and investors.  Management also gets to do this without public and press coverage.

A very interesting fact is that the top four Private Equity companies including Carlyle Group, Blackstone, KKR and Apollo have around 6000 partners and employees yet; according to The Economist, “the value and economic importance of the businesses held by their funds (which are owned by the limited partners, rather than being company assets) are far greater.  The 275 companies in Carlyle’s portfolios employ 725,000 people; KKR’s 115 companies employ 720,000.  That makes both of them bigger employers than any listed American company other than Wal-Mart.”  When you take into account the companies owned globally by the 6300 Private Equity companies, it is dramatic.

When you look at the next group of up and comer giants such as General Atlantic, TPG and Warburg Pincus the results are also impressive.  According to Bain, a management consultancy, in 2013 private-equity-backed companies accounted for 23% of America’s midsized companies and 11% of its large companies.  This number continues to grow.

While all this sounds very strong for Private Equity there are many concerning issues.  One is that with the enormous number of Private Equity companies, the number of new financially sound deals needed to feed the need of the global cash chasing better returns are getting harder and harder to find.  Luckily for the management the Limited Partners investments are tied down for a 10-year minimum.  Another is the cost of money.  As borrowing costs rise making investment money harder to use for leverage and the lower amount of good acquisitions there are then prices and multiples make it harder to do financially smart deals.  Tax laws are now favorable for Private Equity, but with the populist sentiment that is becoming very vocal that can change and impact the economic model it offers even more.

If you are a privately held company or a family owned LLC, Private Equity companies can be an excellent place to plan on focusing your exit strategy.  The sheer numbers and the various industries and verticals they cover can provide significant possibilities for achieving a good return if your company has strong products or services.  With strong leadership, client base, effective sales and financials in place, the attractiveness to PE companies looking for stronger deal flow can significantly improve your chances for acquisition at a strong price.

 

 

 

 

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