Opportunity Knocks: Private Equity Funds Offer Eye-Catching Options
By Mike Paparella & Matt Jamison
Universal Advisor , 2005 Issue No. 2
IN 2004, ACCORDING TO Thomson Financial, U.S. M&A activity reached more than $770 billion. This year, the upward trend is forecasted to continue with projections of $1+ trillion in deals, the first such year since 2000. Volume peaked at $1.5 trillion in 1999, bottomed out at $445.3 billion in 2002, rose in 2004, and continues to rise in 2005. Private equity firms are one of the drivers for this activity, as these firms invested nearly $98 billion in new or existing portfolio companies in 2004, a record amount for any 12-month period for domestic buyouts by financial buyers.
Private equity funds have gained importance with owners of middle-market companies, as more and more middle-market transactions have private equity groups on the acquiring end of the deal. Private equity refers to funds that have been raised and “pooled” to provide the equity, combined with debt from commercial banks or other funding sources, to supply the capital required for a transaction. According to Thomson Financial, private equity groups raised $128 billion in 2004. Those funds, coupled with the hundreds of millions from previous capital raises, arm the private equity groups with enough “dry powder” to be very acquisitive.
Private equity funds offer the seller an exit opportunity different from most other buyers. “A fund has several advantages,” says Peter G. Davies from Stonehenge Partners. “First of all, if the right fund is chosen, the fund can and usually does serve as a value-added business partner in areas such as finance, strategic planning, and board-level oversight. Second, the owner usually continues as an integral member of the management team. Finally, in firms such as ours, a minority ownership position is within the framework of our investment parameters, which can allow the owner some level of liquidity while maintaining a majority ownership position.”
Adds Daniel L. DeSantis from Linsalata Capital Partners, “Partnering with a private equity firm (versus selling to a strategic buyer) essentially allows the company, and with that its management team, headquarters, and employees, to remain intact as a separate entity. This results in little, if any, disruption to the company’s operations. The key concept is partnership. An owner can also maintain a significant interest in the company when selling to a private equity firm, if desired. Further, by partnering with a private equity firm, the owner provides the management team the opportunity to own part of the company.”
Each private equity group has its own investment preferences and criteria, with sought-after attributes ranging from industry, to size, to geography, and more. Each fund also has its own management style and culture. Assessing these characteristics is vitally important to the company owner when deciding with which fund to partner. These assessments are of particular importance when the existing management team remains with the company post transaction, when they’ll be working closely with the private equity professionals who serve as advisors and board members to the company.
There are thousands of private equity groups from which to choose. P&M Corporate Finance, LLC (PMCF) works with company owners to address their investment banking issues, ranging from selling all or part of their company, to assisting with acquisitions, to raising capital to fuel growth or replace debt. One of the roles of PMCF in any of these engagements is to identify the best partner for the company owner, and in the case of selling all or part of a company, many times that best partner is a private equity fund. Given the favorable environment for M&A and the newfound appetite for acquisitions among the private equity firms, Fortune may be calling. Are you going to offer him a seat?
