These days private equity is in the mix across swathes of the mid-market and in some market sectors it’s everywhere.
In the IT channel space and, with the exception of very small businesses, we have researched every single one in the UK in detail. When we did this, I was staggered to find that (depending on where you set the bottom bar for what counts as mid-market), PE and hedge fund ownership is probably a bit over 50% already. If you’ve now got something of decent size and quality to sell in that space you will be dealing with PE in your process whether you want to or not.
In my experience, PE, like banks, will always tell you they are open for business despite challenging market conditions, even when they’re not really open for much business.
It’s inescapable that the PE model when it works well is built around leverage, and it benefits from banks and other creditors taking some of what really ought to be equity risk at low or no pricing. Given that these leveraged deals will always, or almost always, incorporate ratio-based interest and debt service cover covenants, the amount of leverage PE can get into deals has to be significantly lower at the moment.
That means that, to make a deal work, either the pricing has to be lower or the PE return has to be lower (as proportionately more equity is required) or both.
It’s fairly clear from all of the above that, if you are a prospective seller of a mid-market company and private equity is significantly in the mix in your buyer pool (which it probably is) then now really isn’t a good time to be starting a managed sale process.
However, market conditions have always been cyclical in the past and there’s no reason to believe it’s any different now. PE funds exist to invest and won’t survive in the medium term without doing so.
Whilst PE was a major factor in driving record M&A activity and pricing in the period immediately prior to 2022, there was also record PE fundraising taking place that was more than replacing the capital being invested. As a result, private equity “dry powder” in mid-2023 was approximately $2.5 trillion according to S&P Global, up 11% from the December 2022 figure and up 40% from the height if the M&A market in early 2021.
Also in mid-2023, Bain &Co reported that PE funds were currently seeking to raise a further $3.3 trillion. Whilst that will exceed the capital available to be raised, dry powder will inevitably increase significantly beyond the current record levels. All that money will have to go somewhere.
If you are a prospective seller to PE and have decided that now’s not the right time, the chances are I would agree with you even though it’s part of my job to sell mid-market companies. I do think, though, that there are enough factors in play to suggest that better market conditions are likely to return quite quickly.