With the first half of 2014 coming to a close, it is important to reflect on some of the most important insights and developments — expected or not — that we have learned this year.
To get a comprehensive feel for 2014 thus far, we have looked back at some of the conversations we’ve had with Members and other deal professionals and examined their varied perspectives and opinions. The result: 14 must read quotes from 1H2014. They include perspectives on deal flow quality and pricing, social media, family offices, mezzanine debt, and more.
Read the quotes below:
“If I talked about qualities of earnings reports 10 years ago, people would have been confused as to the jargon. But now, the vast majority of financial and strategic buyers want to do quality of earnings analyses on target companies. Sometimes, the sellers even do their own quality earnings analysis on their own company before they bring it to market to anticipate the likely questions.”
– Jim Hill in Examining the Deal Flow Challenge
“Many of these families don’t know how to find the relevant partners or deal flow. They do not know who to trust, and they don’t have a lot of connections in the network…They want to be known in the marketplace to the right parties because they want the deal flow…There are new family offices starting every day. As the industry grows, there will be family offices that are set up that recognize the benefits of being public.”
– Richard Wilson in How Family Offices Approach Direct Investing
“Tweeting has become one of my favorite projects. It gives me time to read and engage with material that I wouldn’t always have the time and space to do. If you are rushing around and don’t give yourself a moment to explore, you are missing out on this rich dialogue that is happening on Twitter. When I grant myself time to read something on Twitter — I’m always learning.”
– Julia Karol in The Dealmaker’s Guide to Social Media
“Inflation is an exogenous risk. When you speak to most investors today, they don’t necessarily view US inflation as a real problem for the next 1-2 years. Yet they still want inflation protection — because they need to address all risks. If inflation does occur, it will be too late for investors to buy affordable protection.”
– Alex Massa in Addressing LP Concerns: Protecting Against Inflation
“One of the most important things we do when speaking with a business owner is to ensure that we have an understanding of their business values and the end-result of the desired transition. Our values, with regard to how the business will be run, need to align. If they do not, it can cause significant headaches and hurdles in the future. If the values are clearly conflicting, it’s a non-starter…To flush out these [value-related] issues, we sit down and discuss the owner’s plan. We want to really understand how the owner sees the future of the company.”
– Kevin Coughlin in Should You Be Conducting Values Due Diligence
“There has been increasing diversification of the search fund model recently. People are spotting inefficiencies in traditional models and are shifting appropriately. One of the most popular alternative models is many searchers are now seeking one or two partners that will support them with committed capital and advice, instead of going to 20 different individuals. It is a real partnership.The new model is appealing to searchers and business owners alike since it brings committed capital, energetic youth, and ‘gray hair’ experience to the table.The combination of young searchers to run the business combined with more senior partners offers an appealing partnership.”
– Kousha Bautista-Saeyan in Why the Traditional Search Fund Model is Changing
“We’re seeing a lot of interest at the $3-$4 million EBITDA level from very large, established firms — both as investments and as add-ons. Firms that are significantly larger with very strong reputations are going down into that space. Anecdotally, every time we go out with a transaction, we run into several new firms. A lot of these firms were founded in 2012 or 2013 or raised their first fund within the last 18 months. There is just a lot more competition in the space causing firms to look in all areas of the market.”
– Michael Schwerdtfeger in 4 Trends Impacting Dealflow Quality and Price
“One of the most obvious benefits [of evergreen funds] is the one management fee…making it more manageable, more transparent, and a good advantage for LPs.”
– Mason Myers in What is an Evergreen Fund?
“Many traditional mezz shops are evolving into more growth-oriented investors. They are structuring their investments as debt with a significant equity component and the use of proceeds will be for growth purposes. This investment style requires different skill sets and has more risk, but has better upside for the investor.”
– Joe Burkhart in Two Trends Shaping the Future of Mezzanine
“PE firms are willing to really overpay for a business that fits their model because they know they can make the returns on the back end. Since there is so much concern about yield, a business that can deliver solid returns is worth a high price.”
– John Carvalho in 4 Trends Impacting Dealflow Quality and Price
“Businesses which have a solid business plan that is scalable model and/or produce a product with limited distribution, and less competition are more highly desired. In this type of company private equity funds can take these business, put in additional capital, and quickly grows sales and profits… The money for leveraging good companies is coming cheap and there is a lot of competition in order to fund deals. When you see WACC being influenced by the lower cost of debt, it helps to justify high multiples.
– Rick Schmitt in The Widening Valuation Gap
“If there is any potential conflict of interest, it’s always prudent to get a fairness opinion. Any M&A transaction where the issuer is purchasing or selling an asset from/to a related party should include a fairness opinion. The related party could be an officer, a director, large shareholder, or an affiliate. If you are doing an acquisition under $100 million, it is typically going to be much more financially efficient to pay for a fairness opinion upfront rather than have a legal battle later on with a handful of shareholders that dispute the value of the transaction. If you go to court with multiple shareholders, you will have to face several law firms and can easily incur hundreds of thousands of dollars in legal fees.”
– John Leo in When to Use Fairness Opinions in Private Transactions
“Bankers will sell an asset to someone in their top tier buyer list 55% to 60% of the time. That means that 40% to 45% of the time, the buyer is going to come from outside the top tier. This [demonstrates] that it’s better to undertake a broader rather than narrower process.”
– Joe May in The Complete Guide on How to Build a Successful Buyer List
“Congress has sought to increase the size of the SBIC program from $3 billion in FY 2013 to $4 billion in FY 2014 to help promote small business’ access to capital. In addition, the Senate Small Business & Entrepreneurship Committee has passed legislation that increases the maximum amount of federal leverage for a family of funds from $225 million to $350 million and also requires the public posting of certain fund performance data on the SBA website. The SBIC program is already a good arrangement for many private equity funds. An expansion of the program at the federal level, combined with increased interest in SBICs by banks due to the Volcker Rule could result in a significant increase in the number and size of SBICs in the near future.”
– Scott Gluck in 10 Regulatory Items PE Firms Should Watch in 2014