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Ned Brown Executive

High levels of dry powder; concern or opportunity?

Has there ever been a better time to sell to a financial buyer? According to McKinsey’s 2018 private market annual review, there is an estimated $1.8 trillion of private equity dry powder (capital yet to be invested).

By Ned Brown
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What does this mean? Is it an indication of a buoyant fundraising market with increased macro-economic confidence or is it an accumulation of capital due to a lack of suitable targets? A combination of both is most likely.

These private equity funds will have increasing pressure from their limited partnership (LPs) investors to acquire companies and with a limited number of suitable targets, this plays into the vendor’s hand and will (in theory) increase multiples paid on sale.

The latest BDO Private Equity Price Index (PEPI) supported this theory; the PEPI reported that on average private companies are being sold to private equity buyers for 13.5x historic EBITDA. The highest recorded in the last seven years.

What does this mean for a private company looking at the possibility to sell in a bullish M&A market? To avoid mediocre and diluted returns PE firms are on the hunt to deploy this dry powder but what are they looking for in a private company?

  1. Defensible competitive advantages and a strong market position
  2. Achievable growth opportunities
  3. Consistent, recurring cash flows
  4. Experienced and cohesive management team
  5. Synergies
  6. Scalability without significant investment

The above is further supported by some of our own recent transactions. In Q2 2018, our deal team were lead advisers on the disposal of eSight Energy Group Ltd, a leading developer and supplier of energy management software, to German private equity firm – BID Equity. The whole process cementing the fact there is increased appetite for acquiring good quality businesses by financial buyers.

Here at PEM Corporate Finance, in addition to our core services, we conduct strategic reviews for a wide range of businesses. This bespoke, independent process holistically amalgamates; company, market, sector, financial & qualitative information. This information is analysed by our experienced team and presented to the company’s shareholders. A collaborative opinion of the current position of the company and its future potential is formed, commonly leading to strategic action points.