Plante Moran and Benesch are pleased to share an overview of the topics discussed at our first Private Equity Forum held October 2, 2012 in New York City. Topic #1: "Hot Sectors for Investors--A Rounded Perspective" moderated by Plante Moran's Dennis Graham.
The panel focused on four primary topics.
1. Deal flow in 2012
- Comparable to the residential housing market in that many companies are available for sale, but the quality of the companies for sale is poor.
- This condition has led to poor closing rates on many deals for three reasons:
- Deals that pertain to average or below-average performing industrial companies are experiencing less than desirable closing rates due to some of the embedded issues within these companies that surface during the diligence stage.
- Deals that pertain to high-performing Companies are seeing higher closing rates once an LOI has been agreed upon; however, fewer deals are making it to this point (LOI acceptance), because of disconnects in valuations between buyers and sellers.
- Due to poor closing rates, buyers are getting “second swings” to purchase companies that have seen their deals with other buyers fall apart—a situation that typically results in a reduced valuation of the acquisition target.
2. Characteristics of deals
- Competition to land good deals in the industrial sector is fierce due to:
- Available “dry powder” of financial buyers.
- Strong balance sheets of strategic buyers coupled with strong desire to grow.
- Access to third-party financing to both financial and strategic buyers.
- In addition to offering the right price, it is increasingly becoming more critical for buyers to offer competitive, creative financial deal structures to differentiate themselves from other buyers.
- On a related note, there has been an increased number of earnouts for the smaller and midsize deals.
- Smaller deals have been particularly difficult to close this year due to the many nuances of dealing with somewhat unsophisticated business owners.
3. Attractive industrial sectors in 2012 and the near future
- Heavy truck
- Infrastructure—pumps, electrical, etc.
- Oil & Gas (but not E&P)
- Service parts/Aftermarket
- Specialty chemicals
4. M&A activity outlook for 2013
- No major fireworks are expected in 2013.
- Cautious optimism that M&A activity will be respectable.
- Two key items are likely to temper any significant increase in activity: the slowdown of China’s economy and the continued struggles of Europe’s economy. Both have palpable ripple effects on the world economy.
This is the first of a three-part series. Overviews of Panel 2 and Panel 3 are available online.