This month’s issue of the monthly executive brief providing M&A market insight for C-level management and their professional advisors.
Private equity (PE) data through three quarters of 2012 reveals that the bulk of PE M&A transactions have been square in the core space of the middle-market, with 68% of all done deal transactions under $100 million in size, and 50% of all transactions under $50 million in size. Why the shrinking deal size?
Economic uncertainty continues to plague the M&A market and management teams have become cautious. The larger a transaction is, the more the potential risk. The number of transactions over a billion dollars has shrunk to a level not seen in a decade. The goal of each private equity fund is to create value by buying companies for their portfolios and selling for a profit 5 to 7 years later. Each fund has a specific dollar amount to invest, whether they buy five companies for the portfolio or ten. By diversifying, the portfolio risk is reduced. The strategy of adding several smaller platform companies and then using even smaller companies to add-on to the portfolio has been the trend this year for private equity, with approximately half of all transactions involving an add-on.
In addition, private equity has money to spend and has found that investing in add-on companies is a viable way to invest that cash. Once fundraising for a particular investment pool has ended, the fund has a limited time frame within which to invest the funds. For the past several years we have seen large amounts of un-invested capital or “dry powder” sitting on the sidelines waiting to be put into play. Private equity investors have been very cautious about adding companies to their portfolios, especially large ones. They don’t want to make a mistake.
A trend has emerged in 2012. Add-on companies are being used as viable way for private equity to spend dry powder and reduce portfolio risk. We see this trend continuing into 2013, which is good news for middle market business owners who are contemplating a partial or complete business exit.
For more information contact:
Douglas Nix, CA | Vice Chairman CFA
905 845 4340 ext. 211