July 7, 2011

Private Equity Back in the Game

Ash Sethi – Analyst, MergerTech Advisors

Often the most interested buyers for company are not competitors, but Private Equity (PE) firms.  PE firms typically raise pools of capital and debt securities to make sizeable investments in the equity of companies, often taking controlling or significant minority stakes.  The funds partners and consultants will then apply their domain expertise to help the management of the acquired company grow and fulfill the firm’s potential.  After an average window of 3-7 years, the PE firm will receive a return and exit their investment, usually by offering the shares of the acquired firm to the general public via an IPO an M&A transaction.             

Many PE firms were caught badly off-guard during the subprime crisis as client withdrawals and frozen credit markets severely impaired their ability to support highly leveraged portfolios.  The technology M&A space hit an eight year low in 2009, as a log-jam of distressed investments obstructed most PE firms from entering into new deals.  Now, PE buyers are back in the game as bank recapitalization has made debt financing for acquisitions more feasible and increasingly attractive assets are being brought to market.  

Though the credit crisis has ameliorated considerably from its height in 2008, PE firms have recognized that the supply of cheap credit is likely to be under some constraint in the short and medium term.  Investors in buyout funds are in no mood to again get caught without a chair should the credit music stop, thus traditional structures that sought to maximize leverage are no longer the most attractive candidates.  Now less reliant on scoring through financial engineering, PE firms are instead moving towards investing in sectors where there is significant potential for value creation through managerial and operational improvements.  Historically speaking, funds that have deployed capital while exiting a recession have realized strong returns for investors. 

In seeking opportunities to optimize mix across portfolios, technology companies both in the mid-market and large-cap space have emerged as appealing targets.  Technology firms developing products which upgrade the operational performance of commercial processes as well as enhance the quality of entertainment services have exponential potential for rapid growth, and not surprisingly PE firms are bullish on the long term demand environment.  PE buyers are consequentially showing an increasing presence as co-sponsors in high value technology company acquisitions, as well as in cross-border transactions.   Check out our latest MergerTech Intelligence Report for an example of one such deal.