Types of Potential Buyers

Your buyer may be a similar business. It may be the same size as your company, somewhat larger, or a major industry player. It may be located in your market, or it may be active in a parallel market and interested in expanding by acquisition. It may also be a competitor. To protect you, a business intermediary offers experience and an added layer of insulation when approaching your competition.

The second type of potential buyer is usually a private investor – typically a high net worth individual looking to purchase a project or an income generator for themselves. When dealing with private investors, you will find a business intermediary to be a useful filter; by asking a series of involved questions, they can distinguish buyers who know what they want from pseudo-buyers who are casually browsing the market.

The third (and sometimes the most significant) category of buyer is a “private equity group” (PEG). Often overlooked, PEGs are involved in more than half of the mid-market deals that occur.

What Is a Private Equity Group (PEG)?

Private equity groups are essentially groups of investors who have combined their collective resources, business experience and management skills to form an investment group capable of raising and investing significant sums of money. These groups typically purchase and manage several companies simultaneously. Not surprisingly, PEGs tend to be relatively sophisticated buyers that pose unique challenges to unprepared sellers.

Where Private Equity Groups’ (PEG) Money Comes From

PEG money comes from two chief sources: (1) the member investors and (2) lending agencies, based on the investors’ combined capital and the PEG’s existing investment portfolio.

In some instances, PEGs are publicly traded and draw on the associated funds for their investments. In 2006, U.S.-based PEGs set records when they raised $156 billion in new capital. Recent estimates put the global numbers at $400 billion available for investment; with leverage, that $400 billion could equate to nearly $2 trillion in buying power. While the exponential growth in the private equity market has slowed somewhat in recent months due to turmoil in the financial markets, the long-term outlook continues to be strong.

What Do Private Equity Groups’ (PEG) Buy?

Types of PEG investments vary from group to group. In some cases, PEGs will make acquisitions as part of industry consolidation, commonly referred to as a “rollup”; sometimes they will acquire companies in synergistic purchases; and, in yet other cases, investments are made in order to provide a growing company with growth capital.

Industry Rollups.

Industry rollups involve the acquisition of multiple companies in a certain industry. The acquired companies are then combined or “rolled up” into one master company. This allows significant and rapid growth, potentially profitable expansion across markets, and the creation of a larger market presence virtually overnight.

To illustrate: A PEG owns a $1 million company that it can sell for four times earnings. If the PEG owned a $10 million company, it could sell it for six times earnings. So, in order to maximize profit, if a PEG purchased ten $1 million companies for $40 million, it could combine them and re-sell the new company at six times earnings for $60 million, potentially making the PEG a $20 million profit.

Synergistic Purchases.

Synergistic purchases typically focus on companies offering similar products or services. It may also involve the purchase of a supplier as a way for reducing material costs and assuring sources of supply. In the process, the PEG increases productivity by decreasing overlap and external costs.

Growth Capital.

One of the more diverse types of investments that PEGs make is the investment of growth capital. While typically offered in a number of different forms, its core purpose is to provide a growing company the capital it needs to expand past the “grow-or-go” choke-point. Growth capital investments can include purchasing partial interests as well as complete buyouts. These investments not only free up or provide additional funds for marketing, expansion, research and development; they also can provide skilled management resources, consulting, and increased credibility.

Other Benefits of PEG Deals

From the point of view of a seller, deals involving PEGs typically offer certain benefits that are not as common among other types of buyers.

Professionalism.

Unlike other types of buyers that might be first-time or exploratory investors, PEGs are professional investors focused specifically on making money and closing deals. They don’t require special financing; can be relied upon for a consistent, professional approach; and typically bring extensive expertise to the table. These factors can significantly increase the speed at which deals close and can help to minimize unexpected costs.

Flexibility.

Depending on the business and the PEG’s investment focus, a PEG may execute recapitalization investments; outright purchases; majority share acquisitions, in which the PEG takes over management; or minority investments, where the PEG invests but looks to the seller to continue to run the business.

Closing Thoughts

PEGs look at each purchase as a piece of a bigger picture. As a result, most (but not all) PEGs have exit plans in place prior to the transaction. The typical holding period for most PEGs is between three and seven years.

When dealing with a PEG, the role of the business intermediary takes on greater importance. At Eaton Square, we utilize a database that contains over 4,000 PEGs – each having a unique style, preferred industries, investment requirements, and management footprints.

Due to the sheer number of PEGs out there, it is important that business intermediaries work as matchmakers, not salespeople. A successful deal not only results in the sale of a business, but it also requires chemistry both managerially and ideologically. In addition to our duties as business intermediaries, we balance the playing field and ensure that the seller is fairly represented. Most PEGs have professional buyers on their investment team. The main job of those individuals is to investigate, pursue and negotiate the purchase and sale of portfolio companies. As a result, they are very knowledgeable and skilled at finding and making the best deals possible when it is time to negotiate. Having a seasoned expert as a representative will not only maximize profit, it will avoid costly mistakes and misinformation.

Because virtually any desirable company may become a target for PEG acquisition, business owners who are preparing to sell should be prepared to respond to inquiries from these sophisticated, well-heeled buyers.

If you have questions about private equity groups or potential buyers, feel free to book a call with any of our senior Principals.

*This article originally appeared on IBG Foxfin site.

Topics focused on at this year’s event included:

• Impact of digital disruption
• ESG-based strategies and impact investing
• New opportunities for growth PE investments in Healthcare and the IT Services sectors
• Business succession

Offshore focus: positioning for global growth

Neil Bourne, our managing principal, facilitated a discussion on international expansion strategies with:

• David Odgers, IFM Investors
• Grant McCathy, Tidal Venture
• Trena Blair, FD Global

Three takeaways: International Expansion

1. Lockdowns has forced us all to get much smarter and more comfortable with working with remote teams. So post lockdown we are changes in the ways that companies prepare for offshore expansion both in terms of the way they gather intelligence prior to committing significant resources or in the case of early stage companies moving away from a fly-in ‘tourist’ approach in favour of relocating a founders for 3-4 month blocks whilst using remote working to keep the home fires burning.
2. It is easier and cheaper than ever to start building international sales. However, it remains tough building scale; regulatory and cultural barriers are still hard to navigate for an outsider and so M&A can still play a key role in acquiring customers, and staff who have a deep understanding of their market.
3. International expansion for most businesses is one of several growth options. Sometimes it can be smarter to first focus on growing scale domestically.

Debt Funding

Kelley Myers participated on the panel for Debt funding joined by:

• Mick Wright-Smith, Epsilon Direct Lending
• Paul Kennedy, Bain Capital Credit
• Matthew Grigg, Paddington Finance

The panel was moderated by Nick Sweeney, Head of Macquarie Mid Market.

Three takeaways:  Debt funding

1. The panel highlighted the growth of debt funding pools, especially offshore, on the back of the low yield environments, and the innovative structures that have been issued in the US and Europe. Borrowing structures for the Australian market can serve issuers although the consensus was that Australian creditors tend to be driving the market currently. Incoming capital from offshore tends to be industry-specific and conditional on bigger tickets for direct lending. Subsequent floor discussions suggests that regular sources of offshore capital coming into Australian funds, depending on mandates, can spur geographical drift away from domestic markets.
2. Getting the balance right between debt and equity. The panel talked through the capacity to take on debt at various stages: pre-revenue (R&D finance), recurring revenue, and growth. In relation to growth and funding mandate drivers, the panel also touched on the advantages of convertible bond financing for managing equity dilution and acknowledged the focus on ESG-oriented/ dedicated structures.
3. Very strong 2021 activity across their debt capital areas. On a twelve-month view, the panel had some reservations committing to a direction with the Ukraine situation concurrently unfolding. Broadly there was a positive tone, recognising that private capital markets continue to develop generally, but concede that the dynamic global geopolitical situation and shifting macroenvironment may deliver a bumpy trajectory.

Speak to our Principals

If you have questions about international growth, debt funding or M&A for your business, please reach out to any of our Principals. We offer a non-obligatory consultation to help you with your strategy.

Kelley Myers
Principal

Kelley Myers is a Principal with Eaton Square. She is based in Sydney, having relocated from London, United Kingdom in 2021. Kelley worked with Joseph Dryer, also a principal with Eaton Square in London; they were colleagues at RiverRock Securities, London where she was part of the Advisory & Capital Markets team from 2018 dedicated to SME growth capital financing. Industries served included Diversified Financials, Capital Goods, Transportation, Energy, and Food & Beverage.

E: kelley.myers@eatonsq.com
Ph: +61 459 959 795

Peter Hall
Principal

Peter Hall is a Principal at Eaton Square. He has thirty years of management and consulting experience in a wide range of industries across many countries, particularly in the Asia Pacific region. He has served as C level executive, company director, venture advisor and investor in Australia and the USA. In seven years with The Boston Consulting Group he consulted at CEO level on strategy, organisation design and operational effectiveness in the financial services, airline, building, manufacturing, oil industry, pharmaceutical and public service sectors, based mostly in South East Asia.

E: peter.myers@eatonsq.com
Ph: +61 411 179 228

Tone of the Market

May 2021 market conditions continue to push the limits on maximum liquidity. The now “post-pandemic” struggle for assets has tightened credit spreads to their most aggressive levels in recent memory, while the same competitive dynamics continue to expand leverage multiples, especially for larger middle market issuers. The metrics delineated in this month’s Market-At-A-Glance are at their most aggressive levels since we started tracking data in 2011.

As the non-bank direct lending market builds to the trillion-dollar AUM level, traditional middle-market players such as commercial banks, BDCs, and insurance companies are being forced to keep spreads tight and leverage multiples loose for issuers up and down the credit spectrum. The looming question on many market participants minds is what impact inflation may have on a market that has had the gorged itself on low-cost capital for the last 10 years.

The Private Market Is Hot

There is little doubt in anyone’s mind that the private market is hot, but is it too hot?

Though we made some minor tweaks to pricing and leverage for the month of May (specifically, increasing leverage multiples for $20 million+ EBITDA issuers by a quarter to a half turn, and reducing pricing for the same cohort by 50 basis points), generally market conditions are identical to where they were in April.

In just about every metric possible, this is an extremely overheated market:

• Credit spreads (in both the public and private market) are at their tightest levels since 2018, and in some cases at all-time historic lows;
• Leverage multiples continue to expand, both (i) directly, with investors willing to go an extra turn on EBITDA with the expectation that EBITDA generation will improve in the “up-cycle” and Debt/EBITDA multiples will fall into more traditional metrics post-closing, and (ii) indirectly, with lenders taking a more liberal perspective on the definition of Adjusted EBITDA (i.e., normalizing EBITDA for the full year based on 2-4 months of “post-pandemic” performance);
• Almost all lender constituencies are experiencing greater liquidity, affording them the luxury of taking a more aggressive stance to pricing and covenant flexibility:
• Non-Bank Direct Lenders – now approaching the Trillion Dollar AUM level.
• Commercial Banks – reporting in the April 2021 Senior Loan Officer Opinion Survey on Bank Lending Practices, “Regarding loans to businesses, respondents to the April survey indicated that, on balance, they eased their standards on commercial and industrial (C&I) loans to firms of all sizes over the first quarter.”
• Business Development Companies – Share prices, as a percent of Net Asset Value (“NAV”), staged their largest recovery in the last 10 months—a recovery stronger than in the period five years after the Great Recession.

There is also some new “heat” in the market, but decidedly, not the kind that improves liquidity conditions.  The inflation data in April took many by surprise; consumer prices (as evidenced in the April Consumer Price Index, or “CPI”) rose by its fastest pace in 10 years, jumping up 0.8% following a similarly robust 0.6% in March. On an annual basis, that is 4.2% boost to CPI (over the last three months, prices actually rose at a 7.2% annual rate).

A jump in CPI alone, however, is not earth shattering, in large part because it is usually the product of activity in the more volatile sectors of the economy, specifically food and energy costs. The bump in CPI in April, though, was primarily attributed to “Core CPI”—which specifically excludes food and energy costs. Core CPI rose 0.9% in April, its largest monthly gain since 1982, and annually, Core CPI is up 3% year over year.  Higher prices for used autos surged 10% in April, their largest monthly increase on record.

While the most recent pronouncements of the Fed suggest this most recent inflation surge was “transitory,” resulting from the “re-opening of the economy” and that it will “likely moderate in coming months,” almost nobody predicted the magnitude of the April CPI gains (expectation was less than 0.4% vs. the actual 0.8% recorded for the month).  However, recent data suggests that even a “transitory” increase in prices could have a deleterious impact on market conditions. Already, the April retail sales surprised to the downside, suggesting that U.S. consumers are beginning to balk at higher prices (the Commerce reported on May 14 that Retail Sales were unchanged following a 10.7% surge in March; expectation was for a 1.0% April increase). Additionally, the University of Michigan consumer sentiment index slumped in May, coming in well below market consensus. The Index registered 82.8, down from 88.3 in April, a rather sobering decline of -6.2%.  According to the official University of Michigan report, “Consumer confidence in early May tumbled due to higher inflation—the highest expected year-ahead inflation rate as well as the highest long term inflation rate in the past decade.” 

If the most recent surge in inflation is not transitory, the Fed will have no choice but to increase rates, which will result in a chilling effect on private market activity from higher borrowing costs and the potential for higher default rates for highly indebted companies. Higher capital costs translate to less leverage, and less leverage translates to lower valuations. The consequence of lower valuations historically results in depressed M&A activity, and the cycle continues.

Yes, we have a very hot market, but if the underlying economy may be even hotter, and that might prove to be … Too Hot.

Minimum Equity Contribution

Most lenders remain wary of thinly capitalized deals, and as a general proposition, a minimum aggregate of 50% base level equity (inclusive of any rollover) is likely required for most deals, with at least 30%-35% minimum new cash equity. The market remains relatively tolerant of “structured-equity” solutions below the debt stack however, even supporting cash-pay (or cash/PIK) preferred structures between the debt and common shares.

Equity Investment and Co-Investment

Liquidity for both direct equity investment and co-investment continues unabated. Whereas opportunities for equity co-investment historically were limited by most traditional lenders or relegated to a small percentage of their aggregate debt commitment, interest in equity co-investment has boomed. In most cases, the ability to offer an equity co-investment (and the accompanying “upside” equity potential) will generate lower all-in borrowing costs, enhanced amortization flexibility, and more robust adjustments to EBITDA. Interest in independently sponsored deals also continues unabated, especially in those cases where an independent has secured an LOI at “value” pricing. Family offices are still the best source of straight common equity, and, continuing the trend established in 2020, credit opportunity funds, insurance companies, BDCs, and SBICs will actively pursue providing both debt and equity tranches.

*Securities offered through SPP Capital Partners, LLC: 550 5th Ave., 12th Floor, New York, NY 10036. Member FINRA/SIPC

Stefan Shaffer
Managing Partner and Principal

Stefan has over 30 years of experience in the private market includes hundreds of transactions in North America, Asia and Europe. Prior to becoming a principal at SPP Capital, Stefan was a Vice President in the Private Placement Group at Bankers Trust Company where he was responsible for origination, structuring and pricing of private placements for the Capital Markets Group, both nationally and internationally.

sshaffer@sppcapital.com
stefanshaffer@eatonsq.com
Ph: +61 412 778 807

Today we’ll look at the implications for PE.

From our discussions across the US, Canada and Asia-Pacific, PE firms report that 80-90% of their portfolio companies are OK or at least have enough cash preserved for the next 6-12 months. Note, like the general economy, this doesn’t mean they are thriving, but rather the portfolio companies’ plans can be scaled down with the aim of growing again when the market will be better in 6-12 months.

Some portfolio companies are also doing well and in some unpredicted exceptions, doing even better during COVID than planned, but these are a minority.

Acquisition Opportunities for Private Equity Firms

PE firms are also reporting that they are being inundated with acquisition opportunities, including:

1. Opportunities to invest in current portfolio companies at lower prices
2. Opportunities to buy competitors or bolt-ons at lower prices
3. Opportunities to buy smaller funds
4. Opportunities to co-invest in other businesses owned by PE, looking for support

However, and this is the interesting part, how will PE take advantage of these opportunities? Where will they get the money?

The obvious answer for some is that they have the money on tap and are all set. This is a great position for a minority of funds and we expect that even these firms will be cautious in deploying capital.

However, the reality for many funds is they are keeping whatever funds they have to support portfolio companies and so to take advantage of new opportunities they need additional investment capital or debt.

The challenge on the investment side is that most PE Funds are not planning to raise money for new investment in the next 6-12 months because they don’t think it will work. Where they see great opportunities for their LPs, they have been told there will be support, but they expect the pricing will be lower and the timing more drawn out.

So that leads us to debt. As you know most PE deals rely on debt and PE are reporting that while their traditional lenders are very supportive of their current positions and investments, they have indicated new debt will be much more difficult/unlikely to access. This is especially the case in Asia-Pacific where the range of local lenders is much smaller.

What are the potential implications for Private Equity firms?

1. If Funds can’t access investments or capital there will be less deals, less transaction bonuses and so smaller PE Funds will be looking to reduce overheads and even merge with other funds
2. Fund raising for many will be put off for 6 – 12 months (maybe longer) impacting the growth and potential exits of portfolio companies and returns to LPs, so funds will be looking for cash and new ways to get payments back to LPs
3. Debt for new investments will be much more difficult to access and so PE will need to look wider (overseas) than their traditional sources
4. Debt leverage levels will be more conservative, reducing valuations and making it more difficult for PE to outbid strategic buyers
5. PE will need to exit some assets to secondary buyers to have funds to focus on their core preferred assets

How can PE firms take advantage of Net Asset Value Loans?

One solution we have been discussing with funds is Net Asset Value (NAV) Loans that enable funds to gain debt based on the value of their whole portfolio to be used as they see fit.

NAV loan structures are particularly useful for funds that are near, or past, the end of their investment period and are also helpful to take advantage of “opportunistic” deals that have recently emerged.

NAV loans can accommodate a diverse variety of circumstances and accordingly are keenly negotiated. Typically, however, they are structured in the following manner:

• The borrower is either the Opco, Holdco, or Fund and the NAV loan is guaranteed by the Fund.
• NAV loans can be 10% – 30% of the value of the fund’s eligible assets, which are generally limited by concentration limits and diversity requirements. Valuations are conducted by the Sponsor on a quarterly basis.
• Coupons of ~ 8-12%, payable in a combination of cash and PIK interest (can be all PIK).
• No stated amortization. Maturities up to 5 years.
• Prepayment penalties in the first 12-18 months.
• No financial covenants at the portfolio company level, but negative covenants that can include limits on additional fund-level guarantees, debt, and the sale of assets outside the ordinary course of business.

You can download the NAV Summary here.

*Securities offered through SPP Capital Partners, LLC: 550 5^th Ave., 12^th Floor, New York, NY 10036. Member FINRA/SIPC.

If you have a current or prospective liquidity need and would like to discuss the concept of NAV loans further, please reach out at any time.

Charles Harvey
Principal, Austin

Charles is a Principal of Eaton Square. He spent 35 years as CEO, CFO and consultant to the Fortune 500, Middle Market, Mainstreet and in the Start-up community, including spending time at PepsiCo & Price Waterhouse Coopers.

In an effort to continuously assist our clients and partners during this difficult time, we are launching Eaton Square Perspectives, a video series. In this brief 5-min video, our Principals from different parts of the world try to answer the most pressing questions business owners might have right now. For the premiere episode, the question we addressed is:

What can company owners do now, if they are thinking of selling their firms later in the year?

Warren Riddell
Principal, Sydney

When I think back to the last two crises we suffered, in 2000-2001 with the tech wreck and the GFC in 2008-2009, one lesson resonates with me. In each case, when the market settled, I did a number of transactions and I saw a common theme develop. It comes down to this. Smart acquirers are not looking just for assets, revenue or profit. They are also seeking smart leadership that can supplement their own.

So, one inevitable question you will be asked by a potential acquirer will be – how did you respond to the Covid-19 crisis?

To be prepared to answer this question, I’d break it down into the following:

1. 1. How did you demonstrate leadership?
   2. How did you hold your team together, when many employees would be feeling insecure?
   3. How did you respond to your clients’ changing needs? and;
   4. What tactical changes (as distinct from business strategy) did you make to your business to respond to the needs of your clients, your staff and your shareholders?

How you answer this question will have a significant impact on how potential acquirers will assess your value. The ‘your’ in this context will be both you as a leader and how that leadership was transformed into the performance of your business.

The reason why this is important is that many businesses will use the Covid-19 pandemic as an excuse for their poor financial performance. That is an unsubtle defensive play. Potential buyers will soon get bored with this excuse.

To set yourself apart from the herd don’t use Covid-19 as an excuse. Use it as a demonstration of your ability to respond to the changing market, to respond to clients’ changing needs and to support your people in tough and uncertain times.

The call to action here is about fully documenting what you are doing now, your tactics.

In this way, when due diligence is performed on your 2020 financial performance you will have written evidence to support what you did. Capture the detail, the nuances of what you did. What worked and what didn’t. How clients responded. How staff performed.

Few business owners will do this. They will assume that Covid is giving them an excuse that will be accepted and not challenged. This is false. If anything, due diligence will be tougher.

So, documenting how you showed leadership, how you responded to the changing needs of clients and staff, will be a valuation differentiator.

Advice for Digital and IT Services firms in North America

Andrew Light
Managing Principal, North America

I think the core focus of a company’s leadership right now should be to make sure they leave as many options open as possible. By this I mean that you come out of this crisis with the ability to grow, shrink, or sell your business, – and not have that decision made for you.

Right now the temptation is to focus on the parts of the business that you can control, notably the costs. So while this is naturally something leadership will surely have to do –

• manage costs
• reduce inventory
• exit staff
• access grants
• claim tax rebates

These are all good things to do – but don’t forget the other side of the equation; namely, REVENUE. The old adage is that:

“.. during good times you should advertise, but during bad times you MUST advertise…”

I’d suggest that we should transpose the word Marketing over Advertising, to ensure it covers the widest sense of Business Development to including Branding, Sales, and anything related to the revenue and reputational side of your business.

Looking back through previous recession, depressions, contractions (etc.), there is a consistent pattern that those who extend and increase their Marketing efforts come out stronger.

So if you are looking to sell your business or raise capital coming out the crisis, a strong pipeline and fervent clients will be critical to achieving the highest return and impact for you and your shareholders.

Some businesses will even have had to close their doors, but this shouldn’t mean the Marketing stops. If there really is zero income potential right now, look at what you could be doing to strengthen the brand. What will lead to the strongest recovery for you? Buyers or funders will appreciate your leadership in mitigating the challenges of the crisis, and it will differentiate you from the crowd.

In terms of Marketing costs, you might even be able to take advantage of attractive tariffs in traditional media. Or you could be smarter about where and how you focus your Marketing, to include digital channels and social media among others. So it doesn’t obviously follow that you should increase your Marketing budget, but you absolutely MUST re-double your efforts on your Marketing activity.

Private Equity and VCs Investment Focus

Neil Bourne
Managing Principal, Sydney

Those thinking about selling or raising capital, once this crisis is over, need to work on their Investment Story. We live in an ADHD world and stories are our most effective way of capturing attention and sharing information.

Investment Stories work best when they deliver a positive vision that is grounded with facts, supported by evidence and enriched with compelling examples. Picking up on Warren’s point, you need to think about telling a positive story about how you navigated the current situation,

Private Equity and other professional investors are data-driven types used to running the ruler over new businesses and industries, so sellers need to prepare themselves to educate these shrewd and skeptical outsiders on why their team, company and industry are a good bet.

Pinning down third-party data on market size, structure, competitive landscape and major trends – requires an upfront investment in time and ongoing effort to maintain. So starting early and methodically gathering materials means you will be ahead of the game in bringing investors up-to-speed and increase your chances of securing multiple offers.

Now whilst having the facts down cold, we are not going to stir any hearts without talking about growth. The best stories weave a narrative around:

• a golden prize (market opportunity)
• the hero  (‘our solution’);
• supported with a backstory of who you are, where you have come from, where the industry is now;
• how competition and outside forces are reshaping the landscape; and
• how in light of these dynamics just ‘where and how’ you plan to expand

You need to paint a glorious but plausible future and outline your plan that bridges the story back to today, which may include a role for acquisitions alongside organic growth.

Lastly, before heading too far down this road, make sure to get informed about the market. We have all seen deals fall over after months of work, due to sellers who are unwilling to accept a price that falls squarely in the expected range for their sector and scale. A competitive process will always achieve a better result than dealing with a single party, but are talking about moving the dial up in a known range and this range can be assessed and socialised ahead of time.

If you would like to discuss your plans for your business, we are offering a one-hour complimentary call with any of our experts. You may book a call here. Stay tuned for the next episode of Eaton Square Perspectives.

Rising Popularity of PE Bolt-on

Despite uncertainties in the geopolitical landscape, the data suggests that M&A multiples remain firm and thus PE firms are paying full value for platform businesses (direct investments). Further, this implies that PE firms are heavily motivated to find bolt-on for their portfolio companies (indirect investments).  In most sectors, we observe a premium for scale in exit multiples hence the addition of multiple bolt-ons provides the PE fund with the opportunity to drive down their average entry EBITDA multiple.

Pericles, Prince of Tyre (Shakespeare)

Third Fisherman

Master, I
marvel how the fishes live in the sea.

First Fisherman

Why, as men do a-land; the great ones eat up the
little ones:

Strong M&A Activity Driven by PE Bolt-on

So despite the seeming geopolitical chaos in 2019,  with the substantial weight of dry powder raised by PE funds looking for a home, we see no evidence suggesting the slow down in M&A activity.

We foresee that the coming holiday period will result in an increased number of business owners brushing off their plans for an exit in 2020.

So trying to keep the grandstanding from certain unnamed politicians in perspective, we will take further solace from Shakespeare’s Macbeth:

“Life’s but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.”

 

Over to you

Platform Defined

For the non-PE among us, a Platform is a sizeable business that can form the core of a PE firm’s strategy to grow in a targeted area. The PE firm will aim to find a Platform business and then seek to grow that business with additional capital and acquisitions.

Platforms are important to PE because they commonly provide the central leadership and services that attract other firms to be part of the PE firm’s strategy. In this way, the Platform gives the PE firm credibility to investors and bolt-on acquisitions that the PE firm can get deals done and that they are good to work with post-transaction.

Are you a Platform?

The reason we ask “are you a Platform” is that PE firms are also willing to pay higher multiples for Platform businesses that strategic buyers will pay for the same business, and certainly more than for bolt-on acquisitions.

So if you are thinking about selling your firm and you think:

1. you have good leadership
2. you have a strong market reputation
3. you have reliable revenues and future prospects
4. you have excellent market opportunities but need bolt-on acquisitions

then your firm may be a Platform and may be much better off talking to PE as well as strategic buyers.

The tricky aspect of being a potential Platform, however, is not all PE firms are interested in the same potential Platform companies. PE firms are typically looking at different sectors, varying business model, alternative leadership strategies, etc. So if you want to be a Platform you need to contact the right PE firm to fit your company at the right time.

What PE Firms are Seeking

PE firms are looking for Platform businesses across the US, Canada, Asia and Australia in IT Services, SaaS, Engineering Services, Health Care, HR Contractor Services and Education Services.

Often, a PE firm will seek out a strong market leader in a very specific niche, with the expectation that the business has a sustainable premium on earnings. We know of firms interested in services such as radiology, health IT,  building products and data recovery businesses, typically looking for an enterprise value upwards of $40 million with an EBITDA over $5 million.

At Eaton Square, we focus on understanding what different PE companies are looking for so that we can link you to the right buyers. Importantly for the seller, many PE firms now operate internationally and so it is important for sellers to have international reach to maximise their exit valuations.

If you would like to discuss your strategic opportunities, please contact us at Eaton Square for a confidential discussion.

Andrew Light
Managing Principal

Eaton Square a cross-border M&A and capital services firm focused on services, technology and growth companies in the US, Canada, Australia, Asia and Europe.

The current South African economic outlook is negative with the latest South African Reserve Bank Quarterly Bulletin showing the economy in its 70th month of a downward cycle and business confidence at a 3 decade low. The latest pronouncement by Arcelor Mittal reviewing the closure of some of its operations due to “cheap imports, rising costs and a flagging local economy”, confirm the current low business confidence.

Globally, however, many multinationals are seeking to strategically position themselves for any uptick in growth that will eventually come from the growth in the middle class in South Africa and the rest of Africa and are prepared to invest in South African companies that give them that “gateway” into Africa.

FDI in 2018 in South Africa was largely invested in mining, petroleum refinery, food processing, information and communications technologies, and renewable energy, and the expectations is that this trend will continue with China committing to ZAR193 billion in new investments in the country with a significant Chinese investment in the recently-opened US$840 million (ZAR11 billion) BAIC vehicle plant at the Coega harbour. In addition to the Chinese interest in South Africa, American interest has significantly picked up as investment opportunities in China are seen as difficult against the backdrop of the USA China trade war.

Eaton Square is cross border M&A advisory firm with over 50 Principals across 9 countries including US, Canada, China & Hong Kong, Australia, New Zealand, UK, Switzerland, Singapore and Israel. If you are seeking to explore strategic capital events (exits or Investments) for your company Eaton Square can assist you to maximise your reach through our extensive global network and deep capital markets and M&A experience.

For a confidential discussion please contact:

Reece Adnams
Global Managing Principal

Reece is the Managing Principal of Eaton Square and is focused on M&A and capital services. His industry expertise incorporates IT Services, Engineering, Management Consultancies, Software and Technology and HR Services. With over 20 years of corporate strategy and mergers and acquisitions experience working in both global corporations and small and medium-sized services businesses, Reece’s depth of knowledge is invaluable in assisting clients to navigate the complexities of M&A transactions.

reece.adnams@eatonsq.com
Ph: +61 03 8199 7911

PE to PE SBO exits were previously considered “panic sales” driven by managers with fixed life closed-end funds running up against the clock and thus under pressure either to negotiate fund extension or liquidate their investments.

Today PE to PE SBO’s are the new black. With SBO’s increasingly being seen as an opportunity to create value both for sellers and buyers.

Benefits of Secondary Buyouts

A Secondary Purchase in the PE world can be either the sale of part or all of single asset or an entire portfolio.

One result of strong recent inflows of capital into Private Equity has been the creation of ladder of Private Equity funds ranging from small to huge. With more funds chasing deals of every scale, SBO’s (single asset sales) have become increasingly common as small(er) PE sells to big(ger) PE. A second feature has the emergence of Secondary Funds who specialise in picking up stakes from exiting Limited Partners or the entire portfolios from exiting fund managers.

Benefits to Private Equity managers selling via SBO’s include:

Instant Liquidity

SBO’s can short-cut the time and complexities of running a full managed sale or IPO process. Cash is paid upfront without some of the holdbacks associated with trade sales or the escrow periods associated with IPO’s.

Flexibility and Discretion

The selling private equity firm can choose to sell down partial positions to realise their return while retaining upside exposure. Moreover, likely PE buyers are readily identified and are used to moving quickly, all of which is helpful when the goal is a discreet process with minimal disruption to the underlying business.

Comparable Pricing

With increasing competition for quality assets, the prices paid for SBO’s are increasingly comparable to more traditional exits.

Benefits for buyers

Scale

For larger funds, somebody else has done some of the hard yards in assembling smaller components to create a ‘big enough’ assets to fit with a large fund strategy.

Fast Due Diligence Process

Oftentimes, the incumbent PE manager has already cleaned up potential issues in their portfolio. It is also more likely that robust reporting processes are already in place.

Signs of a Successful Secondary Buyouts

Analysis of returns from secondary purchases suggests that the strategy delivers value to both sellers and buyers. Because of this, we expect secondary buyouts to continue to be featured prominently amongst Private Equity transactions.

Key advantages for sellers include:

• Private Equity buyers are well organised and resourced to conduct transactions.   A sale to Private Equity is less likely to be sideswiped by some of the internal issues that can derail a trade sale to strategic buyers.   Trade sales can fall over for reasons unrelated to the quality of the asset:  management agendas change, not every company has experience in-house M&A teams and sometimes cash resources get diverted to other areas.   Private Equity teams are focussed on finding and executing deals, they move quickly to assess and reject assets that don’t fit with their requirements.
• Private Equity buyers are fast.   The seller can get their cash and are not tied up with escrow restrictions that come with a public listing or dealing with a multi-stage transaction that some trade buyers prefer.
• Private Equity is flexible.  Offering the exiting fund the option to sell all or some of its holdings in an asset.  This can be particularly useful when a manager has made multiple investments in a company across different funds. A partial sale of the component held by its older fund can be attractive in terms of realising value and tidying up the end-of-life fund whilst enabling its newer fund to continue to ride the upside.  Can be an attractive way of tidying up the legacy fund whilst allowing the newer fund to continue to ride the upside.

Key advantages for buyers of secondary positions include:

• Large funds need to buy large assets.  Recent years has seen the emergence of a new category of Mega funds (defined by Pitchbook as those with assets under management greater than USD $5 Billion).  With such large volumes of capital to deploy, these funds are seeking larger assets to buy.    Given the relative lack of large independent targets to purchase, buying assets that have already been scaled up by another Private Equity has obvious appeal.    We see this same dynamic cascading down across all tiers of private equity.
• Assets already owned by Private Equity are relatively ‘clean’.  Potential due diligence ‘skeletons’ are already out of the cupboard are being managed,  good governance and strong reporting disciplines are in place.   Key Performance Indicators for Staff and management are identified and tracked and tied to incentive programs.
• The management teams of PE-owned companies are experienced in working with PE and understand their ambitions and strengths. This enables Secondary investors to continue the journey building on what the previous owners have achieved with an experienced management team.

If you have an end-of-life asset and would like to discuss your options, please contact us at Eaton Square for a confidential discussion.