Ralph Montgomery recently participated in a GF Data® sponsored roundtable in the Atlanta offices of Nelson Mullins Riley & Scarborough LLP. GF Data, which tracks deal activity of 196 private equity firms in the middle market, recently released its Q1 May 2015 report. The purpose of the roundtable was to swap observations about the lower middle market in particular. About 50 professionals were in attendance, including private equity principals, investment bankers, lawyers from Nelson Mullins and other selected service providers.
Here are a few of Ralph’s key takeaways:
1. There was some consensus that the market may be shifting from sales by private equity firms to sales by business owners
Historically, a majority of businesses being sold were private equity firm sellers. Now, a shift seems to be occurring to private sellers. As such, there has been a focus on family-owned and founder-owned businesses.
2. We’re in the center of an environment for good deals
And it’s not likely going to get any better. With readily available capital, low interest rates and a stable economy, every day is a step closer to this window closing.
3. There’s lots of capital chasing a smaller pool of quality deals
Because of the highly competitive environment, private equity is showing more flexibility towards sellers. For example, private equity is allowing sellers to take more equity off the table. In some cases, owners are selling down to 10 percent or below.
4. Speed and certainty of close are increasingly more important to sellers
As such, a buyer who can close a deal more quickly and efficiently stands a greater chance of winning the deal, and not necessarily the one who can pay the most. Buyers are bidding with fewer contingencies to get deals done faster.
5. Seller expectations are often set too high
Still, many owners have unrealistic expectations for the valuation of their company, which remains the #1 impediment to getting deals done in the lower middle market. Sellers often get enamored by announcements of larger deals and correlate those terms to their own situation, which may be apples and oranges.
6. The role of an advisor is not necessarily to find that outlier price
The value of an advisor is not so much to capture the outlier bid, but to maintain the integrity of the process until close. An advisor’s worth is best demonstrated in keeping the process on time, maintaining price from LOI through close, limiting management distractions and preventing a busted process.
The roundtable was a valued opportunity to connect with professionals within the Southern middle market. The discussion reinforced many of the findings of Investment Banking South’s first annual market expectation survey. Namely, that the Southeast is a positive deal environment with increased competition for high quality deals.