Availability of Growth Equity Remains Strong…

Administrator — Wed, 08 Sep 2010 19:31:37 +0000

As reported before, growth equity ($10-$100MM checks for minority positions in late-stage companies) is abundant with almost all participants falling into two camps: those focused on business models (mainly recurring revenues & customer loyalty) and those focused by sector (mainly light manufacturing and business services). General requirements are targets with 10-30% top line growth, profitable, and 3x to 6x expected return on capital (inversely correlated to check size). The biggest challenge we see for these investors is that most seek to be the first institutional money in a company, but much of their target market resides in buyout and late-stage VC portfolios. The VC and PE firms are increasing coming to this realization: two recent VC-to-PE deals are Avista Capital’s acquisition of INC Research (contract research) and Great Hill Partners’ acquisition of medical device sterilizer SteriMed.

Lack of a “PE Put” Depressing Divestiture Activity…

Administrator — Wed, 08 Sep 2010 19:31:09 +0000

Divestiture transactions continue to be unusually under-represented. Contributing factors include lack of the parents’ requirement for capital and, given the reduced PE activity and ability-to-pay, the lack of high-quality “put” option by a selling parent if the asset they choose the divest fail to attract strategic buyers.

Mid-cap PE Sporadic but Improving …

Administrator — Wed, 08 Sep 2010 19:30:38 +0000

In the private equity universe, leverage availability continues to be good for mid-cap buyouts and excellent for recapitalizations, with about 40% and 50% equity participation, respectively being a requirement. Total available leverage is a little less than last year and currently about 4.1x for targets with less than $50MM EBITDA, PE firms are generally limited to less than 7x EBITDA buyout multiples which basically puts acquisition of platforms where strategic competition exits out of reach. Naturally, we therefore see increased focus on add-ons to existing portfolio companies. Debt covenants are less onerous than last year, and almost bubble-ishly non-existent for mature and healthy re-caps. Year to date, mid-cap buyout activity has been driven by the consumer discretionary sector, followed at some distance by industrials, IT and healthcare. Activity in the last few months has even more heavily favored consumer discretionary.

Our PE contacts report varying degrees of deal flow, with less than half reporting the uptick in activity that we’ve all been expecting due to fears of increased tax rates. Most PE firms are being conservative, resulting in fewer deals, but both a higher number and percentage of PE-to-PE deals. Others are building through the downturn by paying up and expanding their comfort zone, with Thoma Bravo and Marlin Equity excellent sector-focused and sector-diverse examples, respectively.

Extreme Event Sensitivity is Prevalent …

Administrator — Wed, 08 Sep 2010 19:30:04 +0000

Across all sectors and sizes, transaction processes are exceptionally event-sensitive. Almost any news anywhere, especially macroeconomic, seems to drive swift and significant transaction-related decision making. Recall the sharp reactions to problems in Dubai, Greece, …

The most significant source of process disruption is the sell-side: negative news immediately creates a conviction that a healthy process and valuation are unattainable and the concomitant decisions to delay or terminate processes. On the buy-side, financial investor decisions are sensitive to events and day-to-day valuation movements. Strategic acquirers have remained consistent in their pursuits through market volatility, with the exception that troubled assets remain out of favor. In GDP-growth sectors, 5x to 9x EBITDA, strongly a function of scale in the $5MM to $50MM EBITDA, is required to get things done.

Large Strategic Acquisitions Will Continue to be a Bright Spot …

Administrator — Wed, 08 Sep 2010 19:29:24 +0000

The most consistent driver of transactions is and will be strategic acquirors that have maintained a consistent appetite for acquisitions since mid-2009. Many examples this week (BHP/Potash for $45Bn, Intel/McAfee $7Bn), unusual for late August. Generally, Boards are pushing management to use balance sheet strength to be acquisitive. Shareholders are demanding company’s begin trending to historical levels of growth for their sectors which is one reason the Information Technology sector has been particularly active.

Schizophrenic Markets

Administrator — Wed, 08 Sep 2010 19:28:21 +0000

In summary, the theme for the last few months (after a hard-stop in activity in late May) has been sporadic improvement in the deal environment, hypersensitivity, and divergent perceptions of business prospects and transactions. We see large cap M&A to remain strong in the coming couple months, with event-sensitivity marking most everything else. Across all sectors and especially in the mid-cap arena, about half our contacts report softening business fundamentals, while the other half’s concerns are mainly prospective. Generally, optimism (or at least lack of pessimism) correlates with scale.

Lots of private money

Administrator — Tue, 23 Mar 2010 17:29:49 +0000

Our forecast for the mid-market: financing activity will be driven by private investors. While plenty of companies are in some stage of an IPO process, but anecdotally fully 2/3 of these assets are using the process to structure an M&A process or are of dubious public company qualifications. On the other hand, we see strong structured equity financing availability for later-stage private companies for $10MM+ and especially $25MM+ check sizes.

Growth and mid-market valuation update

Administrator — Tue, 23 Mar 2010 17:28:54 +0000

Within in-favor sectors late stage assets with strong market position, strong growth or strong margins are attracting increasing (and extremely) strong valuations, e.g. 10x revenues for high-growth companies with $50-$100MM revenues. Strong 2009 private company exits for Tier I assets help drive this phenomenon. More broadly, private company valuations for assets in the $10-$50MM revenue range are in the 2x to 5x range. The valuation used to be strongly correlated to the sector. Now, the segregation is more by asset quality and it’s severe: there is a large hurdle climb for any asset with “hair”, regardless of size, sector or offering valuation. We’ve see such segmentation in the private markets in the last few months, and the same phenomenon is manifesting itself in a fracturing IPO market.

What’s hot…

Administrator — Tue, 23 Mar 2010 17:28:17 +0000

Web 2.0 (consumer and social internet), mobile (esp. advertising and social media), health care IT (revenue cycle management, physician oriented platforms) and cloud computing (development and monitoring tools, desktop virtualization, grid computing) are in favor. For semiconductor and systems companies focused on communications networking are seeing an uptick in demand driven by smartphone and video applications finally soaking up the dot-com era network overprovisioning.

Mid-market Update

Administrator — Tue, 23 Mar 2010 17:27:32 +0000

There is a shortage of investors/acquirors for earlier-stage assets and an emerging glut of interest in mid-sized entities.

For private company and mid-market activity data, see http://tinyurl.com/feb-2010-vc-ma, while public company deals and premia data is http://tinyurl.com/feb-2010-premiums. More on tech mid-market M&A http://tinyurl.com/feb-2010-ma-update.