Private equity investors have more capital to deploy today than they have in years.
Statistics from Seattle, Wash.-based Pitchbook show fundraising activity for private equity funds in North America and Europe reached its highest level in a decade, at $212.6 billion through Aug. 1.
Meanwhile, a report from the American Investment Council, a Washington, D.C.-based trade group for private equity firms, indicates that “dry powder” held by funds globally hit $572 billion in the second quarter, up 6 percent from a year earlier. That level of funding “could signal significant activity for the second half of the year,” according to the report.
For companies in West Michigan and beyond that are considering a sale, the amount of dry powder could translate into more competition from prospective buyers when they come to market.
“There is such competition for good deals, especially on the acquisition side, and there’s such competition because the private equity money is just overfunded right now,” said Dale Grogan, a managing director at investment banking and M&A firm Charter Capital Partners in Grand Rapids.
Grogan describes the present environment as “a really good time for growth capital,” noting that family offices also have taken a more active role in the West Michigan market, although they’re typically harder to access than other sources of capital.
Across the U.S. last year, private equity firms invested $653 billion, down from the $739 billion in 2015 but still the sector’s second-best year since 2007, according to the American Investment Council.
In Michigan, private equity funds invested $13.33 billion into 96 companies last year. Michigan ranked 15th in the nation in 2016 for the amount PE firms invested in in-state companies and 13th for the number of investments.
The Michigan deal flow and capital invested last year compares with $12.29 billion in private equity invested in 85 companies in 2015.
Grogan and other advisers in West Michigan say private equity investors have always been active players in the market. Their activity has heightened since the end of the Great Recession seven years ago, contributing to elevated sales multiples.
“We have a lot of capital to put to work,” said Tracy Larsen, chairman of the mergers and acquisitions practice group and managing partner of the Grand Rapids office for Honigman Miller Schwartz and Cohn LLP.
“We get a lot of interest in private equity, so they’ve very competitive. Even in deals they don’t win, they’re influencing the transaction,” said Larsen, who works with private equity firms across the U.S.
The greater presence of private equity in the market stems in part from more investors being willing to put their money into the asset class, either through individual investments or as part of a fund. In its recent report, Pitchbook notes that private equity fundraising is “still booming” because of “the exuberance surrounding exposure to PE” and from its “outperformance of public markets, unprecedented low yields on credit, (and) lackluster performance by other alternatives such as hedge funds.”
The American Investment Council in July reported that private equity in 2016 generated one-, three-, and 10-year returns that exceeded the S&P 500 index.
The opportunity for better returns has some investors more willing to put money into private equity, said Rabih Jamal, managing partner at Grand Rapids-based DWH LLC, which provides succession planning and turnaround and financial consulting services.
At the same time, as business owners seek to exit their companies, they increasingly are interested in selling to or at least considering a deal with a private equity buyer, Jamal said.
“We’re finding that there’s more openness now than there was years ago,” he said. “In West Michigan, there’s a little bit of uniqueness because so many of the businesses here are generational or family-based. They want to protect their employees and they want to protect their community that they’re in. But as they get to learn what private equity groups have to offer, it appears that more and more of these businesses are willing to overcome those biases and accept what they think is the best deal for them, whether that’s economically or from a legacy perspective as to what they’re really leaving behind.”
Despite that heightened interest, private equity is not for everyone, experts say.
Beyond coming to financial terms, a private equity buyer and a seller need to blend culturally for a deal to work out for both sides in the long run, said Jeff Helminski, managing partner at Grand Rapids-based Auxo Investment Partners.
“There’s a lot of capital out there,” Helminski said. “It’s all about finding the right fit. That matters a lot.”
Formed last fall, Auxo Investment Partners targets middle-market companies in manufacturing, industrial, value-added distribution, business services and other industries with EBITDA between $1.5 million and $15 million. The firm will hold investments long-term — for five years or more — as it seeks to carve out a place in the market between traditional private equity and family offices.
Auxo Investment Partners closed this month on its first two acquisitions and has been working to raise $50 million for its first fund. Helminski reports that fundraising has been going ahead of schedule and is “very strong.”
ROOM TO GROW
Grogan at Charter Capital Partners also sees more investors willing to put their money into a private equity fund for the possibility of better returns and to diversify their holdings. Some investors also like the shorter period they have to receive a return on their investments with private equity or from putting their money into early-stage venture capital funds that back startup companies, he said.
Fundraising by private equity funds remained strong through Aug. 1, according to Pitchbook. In its recent report, Pitchbook expects that private equity fundraising at its present pace would grow 24 percent in 2017 from an “already stellar 2016.”
There is also a move toward lower risk amid some questions on how much longer the economy can continue to grow before a downturn occurs, Grogan said.
“We now have to look more toward safety and a shorter return horizon,” he said.