For a long, long time private equity received far more than its fair share of negative publicity. We see this with nearly every M&A summit we host – Business owners predominately shun PE buyers because of the negative view that equity firms acquire businesses to either consolidate (cut jobs), reduce expenses (cut jobs) and/or break companies up and sell the pieces.
Certainly history is littered with the scenarios described above. However, since mega PE transactions get nearly all the press, it is clear that the view of these professional buyers is very skewed.
In fact, we have found over the years that private equity firms that specialize in acquiring middle-market (and even lower middle-market) companies have a different game plan in mind. Rather than buy and break, they buy and build. Instead of simply using financial engineering to reduce costs/overhead, they bring managerial skills, marketing and sales experience, and operational expertise to take a smaller company (when combined with an existing platform company) from sales and profits of X to X2.
To help educate business owners, the press, and the general public about how equity firms operate in the middle market, the private equity community has created a wonderful interactive research tool, growtheconomy.org.
According to the site, “Growth Economy is a dynamic research database that matches data from two independent sources to track a key driver of the US economy: How private equity-backed companies compare to other U.S. businesses on jobs and sales growth. This powerful research tool is made possible through a partnership between the Association for Corporate Growth (ACG), PitchBook Data, Inc., and the Business Dynamics Research Consortium at the University of Wisconsin-Extension.”
Here is some remarkable data from the site:
Even after the worst recession since the Great Depression, the United States continued to see job and sales growth in nearly every Congressional district because of private equity. The data provided by GrowthEconomy.org shows how private equity investment is the leading driver of jobs sales growth in the middle market.
From 1995 through 2013, U.S. private equity backed companies grew jobs by 83.7 percent while all other U.S. companies grew jobs by 27 percent. Well over three-quarters of this growth comes from the middle market.
From 1995 through 2013, private equity backed companies grew sales by 134 percent, while the United States grew sales by 31 percent. More than three-quarters of this growth comes from the middle market.
OK, I just threw a bunch of data at you, so let’s break it down to a few key points.
First, note the date ranges that the research groups used: 1995-2013. This range includes the deepest, longest, darkest recession since the Great Depression. They didn’t cherry pick their dates by only looking post Great Recession, they included it. Given this fact, the data in the two paragraphs above is remarkable.
Secondly, the termination point of their research was 2013. The last two years have seen even more dramatic growth in job creation and sales growth. I am sure that when they update their data in a couple of years, and include the solid growth years of 2014 and 2015, that the private equity numbers will be even more impressive.
But what is really interesting about the site is that not only do they look at this data on a national level, they also provide research by state, which is enlightening. I have randomly picked a few states for your perusal:
Just barely below Massachusetts, New York and California in terms of deal flow, Texas saw 5,825 private capital investments between 2003 and 2014, for a total value of $435.4 billion. There are 4,025 Texas companies still backed by private capital. The 497 private equity firms based in the state completed a considerable 1,677 of the total number of transactions.
The most active state for private investment, California saw close to 24,000 transactions close between 2003 and 2014, accounting for an immense $436 billion in total capital invested. Nearly 2,600 investors call California home, and they have made close to 13,400 deals in the state in that same timeframe; more than 12,000 companies are backed by private investors.
Those are some impressive numbers. I have bolded what is most telling: the sheer number of companies in both states that are still backed by private equity. I bet that business owners in these states would have no idea that more than 4K companies in Texas and 12K in California are currently PE-backed. Chances are good you may have competitors/suppliers/customers that are backed by PE and you are not even aware of it.
Lest you say, “OK, you picked two of the largest states in the country so the data is skewed,” I will now randomly look at a couple of smaller states:
Oregon saw 780 deals completed by private capital investors worth a total of $16 billion in capital invested between 2003 and 2014. Four hundred ninety-six Oregon-based companies are still privately backed. Forty-seven firms are based in the state and were responsible for 150 of those 780 investments.
Standing at 815, Missouri’s tally of investments made by private capital firms between 2003 and 2014 brought in a hefty $29.7 billion. Five hundred seventy-nine Missouri-based businesses are still backed by private capital. Eighty-nine private investors are also headquartered in the state; of those 815 deals, they completed 221.
Between 2003 and 2014, private capital investors completed 1,882 deals worth a total $108.7 billion in Georgia. Private capital investors have backed 1,311 companies in the state. One hundred fifty investors are located within the state and they made 331 local investments throughout the same time period.
Even in states with much smaller economies we see impressive private equity tallies and investments. If you do the math, of the investments made in these three smaller states, 64% are still backed by private investors in Oregon, 71% in Missouri, and 70% in Georgia.
Look at how your state has performed and how many companies are backed by PE at growtheconomy.org.
If you drill further into the data on each state (and the links I have provided you above will allow you to do that), you will see that across-the-board job and sales growth by companies backed by equity funding has far outpaced each state’s growth throughout the time frame examined, so this data is not a fluke. You can clearly see that firms that focus on middle-market sized companies do so to help them grow, expand, and become more successful. Keep in mind that for many of these firms (especially family offices), the hold period for their investments can be quite long, if not permanent.
I am not suggesting that every privately held company is a prime target for an equity investor. They have specific criteria/features that they look for and if your business doesn’t have those, then they will most likely pass. However, the data proves that you can’t ignore them as possible buyers for your company.
Quite often business owners who attend our M&A conferences and become our clients are hesitant to have us approach private equity given their preceived reputation. Many want to stay on with the business after the deal closing and nearly all are concerned about the legacy of the business and its post acquisition continuity (especially for the employees).
I recently met with two of our clients post close to talk about their experiences. Both had been acquired by private equity firms and both owners have remained as equity partners and are still involved in the businesses. In each case, neither had considered private equity at the outset of our process but through the hard work of our dealmakers, both Brent Roth, owner of UST, and Brad Hennrich, owner of HESCO, came to the realization that partnering with an equity firm would help achieve their professional and financial goals.
If you are unclear about the benefits of private equity as a buyer type for your business, I strongly encourage you to attend a Generational Equity exit planning seminar. We hold these regularly throughout North America and invite specific types of companies to attend. If you are interested in learning more, please email us at firstname.lastname@example.org. We will reach out to you confidentially to find out more about your company, your goals, and determine if you are a good fit to attend.
And special thanks to the folks creating the research behind growtheconomy.org. The data is compelling and really sheds new light on an important segment of investors.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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