TKO Miller is a middle market M&A advisory firm in
Milwaukee, Wisconsin.
MILWAUKEE, June 17,
2024 /PRNewswire/ -- The following is a blog post
written by Tim Oleszczuk, Managing
Director, TKO Miller.
A dam has been built in the middle market M&A world. This is
no ordinary beaver dam, but the equivalent to that of the Hoover
Dam.
This dam's construction reflects a convergence of factors within
the private equity sector and the broader M&A transaction
landscape. Currently, private equity firms are flush with cash
reserves, totaling a staggering $1.2
trillion in buyout funds alone. However, despite this
abundance of capital, the market is experiencing an absence
of investment opportunities. The low supply of acquisition
targets is made worse by several factors, including elevated
interest rates, debt multiples at a 10-year low, and traditional
lenders being tight with credit and underwriting. All of this makes
it difficult for private equity to buy new companies.
Another, less discussed phenomenon is also occurring – which is
that it is a difficult time for private equity to sell its existing
portfolio companies. Normally, financial buyers like to hold their
investments for three to five years, then sell them, and generate
some capital for themselves and their investors.
If you think back to when many of their existing portfolio
companies were purchased, there are some good reasons for why this
current environment might be challenging. Many companies purchased
prior to COVID (2019) at very high multiples are just now
recovering to profitability levels. Valuations have generally
remained strong but are not at those historical levels. The result
of this is that a sale, even now in 2024 for many portfolio
companies, would result in a net loss to investors. No PE firm
wants that on its record.
As a result, the average hold period for portfolio companies
stands at approximately 5.8 years, the longest experienced in 15
years. There has been a small trickle of exits from PE groups but
the backlog behind the dam of portfolio companies that need to be
sold to give limited partners their liquidity is very real.
Now, how does this apply to or affect business owners wondering
when the right time to sell is? Well, let us make it simple for
you: the time is now.
Do you think that our PE friends have been sitting idly just
waiting for rates to come down? No. They have fancy degrees and big
salaries to justify.
They have been working to reduce costs and improve operations in
their companies during this period in an attempt to show growth in
cash flow, spiff up the story, and prepare for that exit. These
companies are going to be lean, mean, and well-packaged when they
come to market.
Now, let's say you are a business owner that wants to sell, and
you don't have all the high-priced/pre-COVID/IRR-hurdle baggage
that private equity is dealing with right now. You have a nice
business. You have nice margins. Even if you have a business that
does not rise to the level of "perfect to sell at this moment" – it
might make sense to overlook some of those issues and go to market
anyway.
You have the ability to take advantage of this window
where there is abundant capital looking for transactions and we are
not yet in a period where you will get lost in the flood of tricked
out and spruced-up private equity portfolio businesses coming to
market.
The companies safely protected by the dam represent a number of
family- and founder-held businesses on the verge of being drowned
in a pool of gussied up PE assets. Due to the current lack of
supply in the market, these businesses have a unique
opportunity to stand out, capitalize on PE's eagerness to
deploy their money, and achieve premium valuations.
However, this is a temporary, unique market we are currently in,
because as soon as that dam breaks, laws of supply and demand will
begin to take over. Valuations will naturally decrease, and
resources will begin to be stretched. Smaller businesses and those
with less than perfect attributes will be disproportionately
impacted by decreases in value.
So Then When Will the Dam Break?
The dam will break when one of two things happens:
- The Fed begins to cut interest rates
- Private equity firms crack under external pressure from
investors to sell
The timing of the two factors is unknown. You can collect data
points on potential rate cuts from all the experts, but the reality
is even the Fed doesn't know when inflation will be considered
"tame" enough to begin cutting rates. On the private equity side,
all firms are notorious for portraying "herd mentality," meaning
once one leading firm decides it's time to sell, the rest will
follow, causing the dam to break.
As a business owner, you might be thinking, "this
is not what I've been hearing on the news." It is
important to understand that a good majority of M&A reporting
is about private equity transactions and not the lower middle
market. Most of that reporting fails to understand the forces of
low supply and high demand. It's an important distinction that we
are in a low supply market – not a slow market. In this
case (think back to Econ 101), you want to be the
supplier.
Contact: Katie Yde, (414)
375-2660
View original content to download
multimedia:https://www.prnewswire.com/news-releases/private-equity-isnt-selling-right-now-but-maybe-you-should-302174613.html
SOURCE TKO Miller, LLC