Within the private equity universe the world is back on track and the eighteen-month nuclear winter is over. PE buyers are seeing many more deals and multiples have jumped (up to 12x plus in healthcare deals). One caveat is that getting debt financing to buy a company with less than $5 million in EDITDA remains tough.
Diligence has gotten more rigorous (including from the limited partners who are doing much more themselves – immeasurably so).
Return expectations are down to 20%, with many funds willing to go lower if a provable safety level can be established (lower return but less risk). Deal structures with respect to percentage bought are more flexible; but structures such as PIPES or other creative securities don’t meet the bar with many of today’s more conservative LP’s.
With the public markets having largely recovered institutions are no longer over-allocated in PE funds so funds are raising money again. LP candidates are increasingly foreign, with China and Australia being mentioned during the panel discussion. And the contracts themselves are going to a more “European” model not the straight 20/80 split of yester year…meaning that the investors get their money back and a floor return before the profit is shared. Any terms that used to allocate the GP 20 percent early are being denied by the LP’s.
What are PE investors looking for? Same as always: management team, culture, a good grasp of financials, clear use of proceeds and a competitive advantage (strong business). Twelve to fifteen slides and an executive summary is better than a fifty plus page book.
Exits? Sure. After eighteen months – during which the market often wouldn’t fairly price a good company – a backlog of potential companies to be exited does exist. But all the panelists agreed that while valuations have risen we aren’t at a frothy market top so they are only feeling a slight nudge to sell some portfolio companies. This LAVA panel consensus differs from the opinions of many PE firms focused on larger deals, where enormous dry powder and a strong high yield market are driving multiples.
Good companies, as always, are hard to find. But if you have one and want a private equity partner I can introduce you to four just from this panel who are actively looking.
Steve Moore – Brentwood Associates
Mark Rosenbaum – Aurora Capital Group
Michael LaSalle – Shamrock Capital Advisors
Alain Rothstein – Vicente Capital Partners