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Family Offices, Private Equity

Top 10 Forum Articles of 2017

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Axial Forum published close to 200 articles in 2017 covering middle market capital markets. We took a look back at ten of the most popular articles of 2017. Below, we count down from #10 to the #1 story of the year.

#10 What Every Business Owner Should Know About Investment Banking Fees

As a business owner, engaging an investment banker is one of the first steps you’ll take on the road to an M&A transaction or capital raise.

A recent study found that investment bankers added value for 100% of sellers. But even if you know engaging a banker is a good idea, navigating the world of investment banking fees can be difficult. However, an increased purchase price can make the fee of partnering with an investment bank more than worth it. As the study notes, “Final transaction fees vary widely from firm to firm but are typically based on the size of the transaction and the services provided. Retainer fees paid by the client are sometimes deducted from the final transaction fee that is paid at closing.”

#9 Capital Superabundance is Transforming Middle Market M&A

Bain & Company aptly coined the term “Capital Superabundance” to describe a flush dealmaking environment in which the availability of financial capital is at record highs while the weighted average cost of capital for companies is experiencing record lows.

This article contains some thoughts on how this environment of so-called “Capital Superabundance” is affecting American middle market M&A and its three major participants: private equity and corporate buyers, investment bankers, and exit-ready or “exit-curious” private companies.

#8 Who Are the Most Recommended Investment Banks and Advisors in the US?

In the middle market, new boutique investment banks and advisory firms spring up all the time. The growing number and diversity of firms can make it difficult for business owners to find a trusted partner when it’s time to transact. It can also pose a challenge for investors and buyers looking to stay abreast of relevant deal flow.

Axial asked 1,000 private equity firms, strategic acquirers, and family offices to name the banks and advisory firms they trust and respect most when transacting in the middle market. We were hoping to see strong regional coverage and got exactly that.

In the end, we compiled a list of 120 advisory firms and banks, headquartered across the U.S. and covering a broad range of transaction experience and industry expertise.

#7 Five Due Diligence Pitfalls and How to Avoid Them

For many middle-market businesses and private equity firms, buying or selling a company can be the deal of a lifetime — one that carries significant emotional and financial risks as well as rewards. Comprehensive, well-executed due diligence can make the difference between success and failure.

Here are five common mistakes made in due diligence and suggestions on how to guard against them.

#6 The Perfect Storm That’s Unbundling the Private Equity Industry

You can read about it all over the news: family offices are the new force in private markets, private equity fee-gouging is leading pension funds to reconsider allocations, deal-by-deal co-investing is surging, proprietary deal flow is on its deathbed, and on and on.

What is really going on here? The mega-trend in motion is the grand unbundling of the private equity fund model, transitioning from the committed capital 2 and 20 model to a more flexible deal-by-deal model.

Of course, a core group of top-tier committed capital private equity funds will continue to leverage their brands, their scale, and their performance records to preserve the current committed capital business model. The rest of the market will largely unbundle, with capital, deal sponsors, and deals connecting on a deal-by-deal basis. And with the unbundling, the 2 and 20 standard private equity fee economics will proliferate into a range of lower and less standardized fee structures.

#5 Should DCF Valuation Just Go Away?

In today’s frothy buying atmosphere, it’s not uncommon to see unicorn startups valued at 100x revenue. While the majority of middle market owners recognize these multiples aren’t realistic, it’s still seductive to read about companies in your industry that were acquired for a high premium and think: that could be me.

In the world of middle-market deals, sophisticated buyers generally value companies more rationally, turning to a range of methods to determine what they’ll pay for a company. As a seller, you want these valuations to work to your advantage so you can secure the best price.

The most popular valuation methods measure very different aspects of your business, though each has shortcomings. One method stands out as being particularly out of touch: discounted cash flow or DCF.

The DCF approach shows your company’s intrinsic value, which is equal to the sum of your future cash flows. A potential buyer then applies a “discount rate” equal to the time value of money (it is assumed that money is worth more in the present than in the future), as well as the uncertainty of future cash flows — the greater the uncertainty, the higher the discount rate.

#4 The No.1 Thing Private Equity Investors Look for in a Company

A recent study by Harvard Business School found that up to half of venture capitalists rely more on gut instinct than financial metrics when making investment decisions.

Among other findings, the study reported:

  • 9% of all VCs and 17% of early-stage VCs use zero financial metrics
  • Nearly 50% of VCs “admit to often making gut investment decisions”
  • 78% don’t adjust decisions for risk factors

In an article in PE Hub, Clint Korver of Ulu Ventures argues that these results suggest that VCs are an aberration in the finance world. “Most professionals in other areas of the financial world, from hedge funds to real estate investors, faithfully use financial metrics to calculate their risk-adjusted return… However, this type of rigor is not routine in venture capital.”

#3 10 Questions to Ask Every Acquisition Target

70% to 90% of all acquisitions fail to achieve the results acquirers want. Why? Most often, failure is directly tied to the integration plan and frequently, with diligence that wasn’t quite as effective as it could be.

According to a 2015 industry study by McKinsey & Company, companies with the best M&A results have strong capabilities in post-close integration. As a consulting firm, we’ve found that high performing M&A firms use the diligence exercise to gain critical insight into the target company, its management, key employees, its culture, and its customer relationships. They take a hard look at not only the financial numbers but at the intangible assets that drive a company’s success plan. Most importantly, they have tools and processes to statistically document the value of the intangible and help them see into the future. They start building relationships with the potential target throughout the due diligence process, months before close.

In every case, the expectation post-close is that the value of the deal will increase. So how do you predict future success? Here are ten questions our highest performing clients ask every potential acquisition.

#2 Five Family Office Trends for 2017

What were the trends that drove family offices in 2017?

We talked to Howard Romanow, COO & CFO of Island Management, a family office based in Darien, CT, and Jim Hoover, Founder and Managing Member of Dauphin Capital Partners, a family office based in Locust Valley, New York, to get their thoughts.

#1 Avoid These 10 Mistakes When Calculating Working Capital

One might think that calculating net working capital is a relatively simple exercise — current assets less current liabilities. However, this simple exercise can turn into a very complicated calculation during a transaction process. At a time when both buyers and sellers just want to move on, they instead face potential arbitration or litigation post-close that could have been avoided overall.

To avoid additional costs and strained relationships, buyers and sellers should take care to avoid these 10 common mistakes.

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