As we reach the midway point of 2013, it is important to reflect on some of the most important developments — expected or not — that have shaped the year. To get a comprehensive feel for the year, we looked back at the conversations we’ve had so far with Members and other deal professionals. We examined their varied perspectives and opinions to pull together the 17 must-read quotes below.
We will continue recapping the first half of the year on Monday with a Webinar with Jason Kelly of Bloomberg LINK and Cody Boyte of Axial, and on Tuesday we will release our 1H 2013 Network Activity Report.
On the Deal Environment:
Strategics have been (somewhat) active:
“Strategics should have been more active this year. However, after a few near-death experiences due to unfavorable financing environments, most of these companies are focusing on building more of a cushion in their balance sheets. They are intentionally sitting on a lot of cash right now.” - Tom Courtney in Industrials YTD 2013 Network Activity Report
Dry powder not as important as it seems:
“There are much more important factors [than dry powder] that predict a fund’s success and fundraising ability: delivering cash-on-cash returns through exits, showing strong relative IRR (supported by reasonable valuations of unrealized investments), articulating clear investment theses for portfolio companies, answering transparency concerns of LPs, maintaining a strong bench and track record, etc.” — Mark Gaffin in On the Exaggeration of Dry Powder
Valuations expected to rise:
“The next 12-18 months will almost certainly be a highly favorable period for business exits. If this proves to be a cyclical market top, the next favorable period for businesses owners wishing to sell may not come around before the 2020s. In 2020 today’s sixty six year old Baby Boomer will be seventy-three and today’s fifty eight year old will be sixty five and studying Medicare options.” John Slater in his guest post Will 2013 See Record Valuations for Middle Market Business Sales
Private equiteers moving to family offices:
“Although it is still a relatively young trend, you are more frequently hearing of private equity professionals leaving firms to move to family offices. Family offices are [hiring] existing private equity professionals to source opportunities, conduct thorough due diligence, negotiate transactions, and work with the acquired companies.” – Howard Romanow in Family Office Trends to Keep an Eye On
Baby boomers looking for exit opportunities:
“[The baby boomers] generally had far fewer children than their parents, and the unavoidable outcome is succession and liquidity challenges later in life. It is the solution to both succession and liquidity that these owners are seeking. The trend is a very promising one for many private equity groups, and even more, for the baby boomers. As the baby boomers look to retire, many private equity firms will be vying for those assets.” – Benjamin Gerut in Will Private Equity Inherit Baby Boomer Businesses?
JOBS Act likely to change investment landscape:
“The JOBS Act will take a large step towards leveling the playing field for capital investments between big companies and small companies and between banks and non-bank lenders. Before the JOBS Act, most of the time only big companies could afford the cost of publicly offering their debt to investors and only banks and SEC-registered entities could get large amounts of funding from individuals. Post JOBS Act, anyone will be able to receive funding from qualified individuals and small companies will be able to use any means of solicitation that works best.” – Mark Sunshine in his guest post The Upcoming Funding Revolution
JOBS Act to also benefit international investors:
“Advertising in US for foreign funds will be a fantastic way to drive competition. As more funds — both domestically and internationally — have greater ability to advertise, there will be greater competition and, as a result, a better market.” – Nate Suppaiah in Are LPs Peeking Over the BRIC Wall?
On Staying Competitive:
The importance of having the right tools:
“15-20 years ago, whoever had the biggest network was the best bank. Today, it is more about your tools than your existing network — you can find relationships you never had before.” – Brian Trauth in The Art of Building a Buyer List
How to brand yourself successfully:
“To market to this niche successfully, you need to understand who you are selling to, why you are selling to them, and what’s in it for them. Most businesses fail within the first three years, and every entrepreneur has the scars to prove it. If you don’t appreciate that sacrifice — if you only relate to his balance sheet and income sheet — you won’t build interpersonal relationships.” – David Mahmood in How and Why to Build a Strong Brand
Understanding business owner sentiments:
“I really believe that most of these retiring entrepreneurs want more than a simple check; they want a real transition with real mentorship…they want succession. Operating partners at large caps are often seen as less significant to overall investment performance, but in the middle and certainly the lower-market, they are truly the head of the spear.” – Benjamin Gerut in Will Private Equity Inherit Baby Boomer Businesses?
For strategics, customers can lead to some of the best insights:
“Your customers are a great resource of information if your field contacts do not have any information. While they might not have as detailed knowledge, they can offer a worthwhile gauge.” - Stenning Schueppert in Best Practices in Cultural Due Diligence
Private equity’s lingo:
“The lingo used in the space is so arcane and out of date that investors have no context for the discussions. The failure to establish a clear, effective communication system has been the biggest sin private equity has committed.” – Bob Rice in Bob Rice on Private Equity’s Jargon Problem
Precision helps you be a better negotiator:
“If you can use precise numbers and back it up with data or analysis, you are likely to be viewed as informed, knowledgeable, and experienced. In short, a precise number is a simple, yet very impactful way to convey you know what you are talking about.” – Elizabeth Wiley in How Precision Makes You a Better Negotiator
On Due Diligence:
Business can be a higher priority than legal and compliance matters:
“Because they do not have the infrastructure and resources of larger companies, they are understandably more focused on building their business as opposed to legal and regulatory compliance matters. This lack of infrastructure and lack of compliance needs to be accounted for in diligence, and private equity sponsors need to determine how to remedy post-closing. Specifically, any resolution may give rise to added costs, through initiatives and/or hires, and this could have a meaningful impact on going forward EBITDA.” – Justin Levy in Best Practices on Legal Due Diligence
Too much — or too little — turnover is a bad thing:
“It is necessary to ask the company about its turnover rate, where its employees move to, the last key employee to leave, etc. If there is a noticeable turnover trend — all employees leaving for the same company or 50% of management team leaving to start a competitor, as examples — that should offer unique insight into culture and the businesses. On the other hand, If a significant number of employees have held the same position for too long, they may fear change and be resistant to acquisition.” – Stenning Schueppert in Best Practices in Cultural Due Diligence
Tax diligence can save you cash in form of credits:
“A proper review of the company’s tax position can allow you to identify previously unrealized tax savings. The lowest hanging fruit is usually the various tax credits: R&D credits, state employment credits, and federal energy efficiency credits, etc. There are so many credits out there that often the CPA of the target company has not properly identified all the opportunities.” – Nick Gruidl in Best Practices in Tax Due Diligence
IT diligence is becoming more important:
“I know of a company whose website was the primary use of technology, but IT due diligence identified half a million dollars of savings. An entrenched piece of custom technology for which they were being overcharged was easily replaced with off the shelf software. Even at a non-tech company, there are significant cost saving and risk avoidance opportunities. It is getting harder and harder for investors to ignore IT due diligence.” – Jim Hoffman in 3 Key IT Due Diligence Questions