Private Equity Acquisitions Questioned
To hear the experts tell it, there is too much “dry powder” chasing too few truly worthy deals; private equity acquirors are duly warned.
At the December 4th Boston meeting of the Association for Corporate Growth, panelists drilled down on whether private equity really has opportunities in the acquisition of “family business.” While some panelists were of the view that private equity can bring better management and the leveraging benefits of borrowed outside capital on top of an infusion of equity, perhaps the most challenging presentation was made by Richard Narva and Dirk Dreux, experienced counselors in the “family business” space, who were less optimistic.
Speaking to the PE community (the conference was attended both by private equity firms and a smattering of representatives of family run businesses), Narva and Dreux made the following points:
- There may be 55,000 companies in the United States with revenues of $25,000,000 or more, the likely pool for qualified platform acquisitions, and 80% of them are privately owned, but a granular look at them is essential. Most are unworthy qualitatively. There is also a plethora of smaller companies some of which might qualify, but only as add-ons to a platform.
- Perhaps the best way to determine if a target company is likely to prove worthy is to look at the quality of governance, the degree to which the private company operates along SOX principles. Is the enterprise advised by a quality fiduciary board, or a non-fiduciary advisory board which is in fact followed?
- With companies this size, value accretion is difficult. A “buy and flip” model is not likely to work. You have to buy, train and grow a company.
- Finally, in ticking off the attributes of a family run enterprise, these commentators noted that sufficient cash flow to satisfy family needs “anesthetizes forethought;” once family goals are met, the drive for growth usually stops.
The suggestion that there was a dearth of PE-quality deals, butting up against an over-supply of capital, did not deter other presenters from discussing the ways in which private equity financing options did in fact help family businesses. The bottom line of the conference for the private equity folks likely was a cautionary tale already known to them; the take-away for the family enterprise folks was likely to be a mixture of sobering reflection mixed with confusion.