Peter Lehrman Axial | October 18, 2017
Bain & Company coined the term “Capital Superabundance” to describe a flush dealmaking environment in which the availability of financial capital is at record highs while the weighted average cost of capital for companies is experiencing record lows. What follows is how this environment is affecting American middle market M&A and its three major participants: private equity and corporate buyers, investment bankers, and exit-ready or “exit-curious” private companies.
To begin, look at the charts below:
When demand rises faster than supply, prices tend to rise.
The chart below details U.S. leveraged buyout purchase prices as a multiple of EBITDA for the past 20 years. Source: Capital IQ.
These macro charts provide the framing for a discussion about the most meaningful effects of Capital Superabundance on its participants in middle market M&A.
Top three effects of Capital Superabundance on private equity investors and corporate buyers:
- A respected and highly memorable brand has become a major advantage. Capital Superabundance is rewarding organizations with differentiated brands aligned to credible value creation strategies.
- “Business Development” has gone from an afterthought to top of the strategic agenda. BD excellence has become just as strategic to private equity and corporate development teams as sales and marketing excellence is inside companies.
Source: BCG - Revenue-oriented value creation. It is often easier to cut costs than to find sustainable methods to drive revenue growth. Capital Superabundance’s upward pressure on purchase price multiples is rendering cost reductions insufficient. Buyers have responded to this reality with increased expertise around buy-and-build value creation models. These approaches play to buyers’ transaction expertise and utilize the increasingly popular “operating partner” model.
Top three effects of Capital Superabundance on investment bankers:
- The “personal Rolodex” approach to winning clients and creating great client outcomes is ancient history. Investment bankers are incorporating modern data services to discover buyers, research real-time buyer intent and engage buyers more intelligently.
- Capital superabundance has made investment banking economic for sub-10M EBITDA opportunities. Combining Capital Superabundance with some of the regulatory changes that have eliminated or relaxed broker dealer capital and oversight requirements for the execution of private M&A, establishing one’s own “micro-boutique” investment bank is easier than ever. Growth in micro-boutiques confirms this.
- The brand of an investment bank is more important than ever. Investment banks are leveraging well-established content marketing strategies to disseminate their expertise, clarify areas of focus, and create an inbound funnel of prospective clients. Similar to PE, sector and transaction specialist bankers are outflanking generalists with more memorable and more focused brands.
Top three effects of Capital Superabundance on middle market companies:
- It’s the most attractive and sustained seller’s market in at least half a century. Multiples are at record highs for businesses across nearly every sector.
- Middle market companies have unusually high amounts of strategic choice and freedom. Capital Superabundance has created a new set of choices for entrepreneurs running middle market businesses. They shouldn’t assume conventional approaches are the only way to realize their liquidity goals.
- M&A educational information is more widely available for entrepreneurs than ever. Free and affordable solutions for entrepreneurs such as BizEquity’s software-powered valuation tool, Axial’s online deal network and The Salability Score are examples of online solutions that educate and serve private companies that are considering a financing or exit event.
For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall, CBI, CM&AP at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com. To search for Florida Businesses for Sale: CLICK HERE
No comments:
Post a Comment