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Thursday, 16 July 2015 09:51

PE investments in Michigan firms escalate amid active M&A market

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Peter Roth Peter Roth

Private equity investments in Michigan are surging with the rest of the nation, as merger and acquisition activity remains strong and provides plenty of opportunity for prospective buyers.

An annual report issued by the Washington, D.C.-based Private Equity Growth Capital Council ranked Michigan 11th in the nation in 2014 for private equity investments, versus 19th the prior year.

Across the state last year, 86 companies collectively received investments totaling $16.2 billion. That compares to 50 companies for investments of $6.7 billion in 2013 and 50 firms for $9.6 billion in 2012.

The strong year-to-year growth rate reflects what attorney Peter Roth calls a “very active, healthy” M&A market where sellers have a greater awareness and understanding of private equity and are more apt to make a deal with a firm.

An M&A attorney and a partner at Grand Rapids-based law firm Varnum LLP, Roth said prospective private equity buyers are in “almost every deal” he’s involved with these days where the seller goes through a formalized sale process.

Compared to just a few years ago, sellers are much more willing to entertain an offer from a private equity buyer, said Roth, who represents a number of private equity firms in the state.

“Business folks are a little more aware of what private equity is and it’s a little less of a scary, dirty word,” he said. “People have gotten more comfortable just because they’ve heard more about private equity and they’ve seen their peers do private equity deals and have them go well, and the private equity guys have gotten smarter about selling themselves.”

The strong M&A market of the last couple of years also drove up valuations for companies on the market, Roth said. That’s caused strategic buyers to pull back somewhat, opening more opportunity for financial buyers who are sitting on capital that they need to deploy, he said.

“The private equity guys still have to put their money to work, otherwise they have to give it back to the LPs (limited partners),” Roth said. “So you have a disproportionate number of private equities in your pool of buyers.”

The so-called “dry powder” combines with a “very strong” M&A market nationally that makes for high competition for deals across the U.S., said Jon Siebers, a partner at law firm Rhoades McKee PC’s Grand Rapids office. As a result, private equity firms based elsewhere that have not historically invested in Michigan are now looking in the state for deals, Siebers said.

“You have all this dry powder out there,” he said. “The private equity groups are digging more and more to find deals. You have firms that are not in the Midwest — that previously didn’t want to be doing deals in the Midwest — that are having to look for deal sources wherever they can find them. So you have more people looking at Michigan.”

The Private Equity Growth Capital Council estimates that private equity dry powder globally totaled $466 billion at the end of the first quarter, the highest level since December 2009 and up from $431 billion three months earlier.

In the decade from 2005 to 2014, private equity funds invested $89.8 billion in Michigan-based companies, nearly 20 percent of which came in 2014 alone, according to the PEGCC. There are now 578 private equity-backed companies in Michigan employing more than 336,000 people combined in the state.

Gretchen Perkins, a partner at Detroit-based Huron Capital Partners, attributes the increased investment activity to Michigan’s improving economy and the ongoing generational transfer of business ownership as aging baby boomers retire and sell, resulting in elevated M&A activity.

“It tracks the recovery,” Perkins said. “We’re five years out of the downturn (in Michigan) and business owners are aging and want to sell their businesses and really capitalize on all of the work they’ve done over their decades of owning and running their businesses. Their numbers are better this year than the year before. That gives you a nice track record of earnings that you can take to the market when it’s time to sell.”

Huron Capital has so far closed on 12 deals in 2015. All of them were add-on acquisitions for existing portfolio companies, including the May purchase of Greater Kalamazoo Auto Auction in Schoolcraft.

Strong M&A activity in the automotive industry may also come into play and could be “skewing the numbers a little bit more,” Perkins said. She expects private equity investing in the state to stay strong for the next 12 to 24 months, as long as the economy remains in good shape.

Perkins also cites a greater awareness of private equity as a viable option for sellers seeking to exit a business, particularly those who stay active in the day-to-day management. Many private equity firms often want to retain the management team at a company they acquire to assure continuity.

“We’re a good option for a business owner that wants to sell a majority of their business but doesn’t want to completely retire and still wants to run their business and stay there,” Perkins said.

Once the economy slows and M&A activity cools, private equity investments will dip as well, Roth said, although firms will remain involved in the state after having better positioned themselves the last few years.

“In the end, private equity is here to stay,” he said. “As a percentage basis, private equity will stay a really significant, majority player in the M&A deal flow.”

Nationally, private equity firms invested more than $486 billion in about 3,100 U.S. companies in 2014, an increase of $43 billion from 2013, according to the PEGCC. California, Texas, New York, Florida and Illinois were the top states last year for investments.

Pitchbook.com reports 1,509 private equity deals for $216 billion across the U.S. in the first half of 2015.

Read 2635 times Last modified on Tuesday, 21 July 2015 10:06

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