Colorado A Leading Western State for Private Equity

According to recent information from PitchBook, Colorado is the third leading western state based on private equity deal activity, behind only California and Texas, both of which have significantly larger populations.

While Arizona represents a larger population by nearly 30 percent, it contains almost 18 percent fewer private equity owned companies than Colorado. And when compared to other neighboring states, Colorado boasts much higher private equity activity per capita.

For example, Colorado’s population is 35 percent larger than that of Oklahoma, but the number of private equity owned companies in the Rocky Mountain

state overshadows its southeast neighbor by more than 135 percent. Likewise, Colorado is about 80 percent larger by population than both Utah and Kansas. However, private equity activity in Colorado is greater by 119 percent and 139 percent, respectively.

While deal activity tends to mirror state populations overall, it is clear that private equity sees something special about Colorado-based companies.

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Colorado a top state for business, but capital lags

Once again, Colorado finds itself ranked as a top state for business in a new study. In a recent analysis from the Kauffman Foundation on the geography of entrepreneurship, Colorado received a top spot. Colorado ranked sixth in the number of Inc. 500 companies per capita during the 2000s. While Colorado continues to be ranked as a top business state and a hotbed for fast growing companies, there seems to be a disparity between capital demand and supply.

According to Pitchbook, the Mountain region accounted for only 4 percent of the total private equity deals in the second quarter of this year. In 2011, that number was five percent. At the same time, Colorado has been perennially ranked as a great place for businesses. CNBC’s annual ranking of top business states placed Colorado at number five in 2011.

According to the Census Bureau, of the 16.7 million businesses in the U.S., nearly 16 percent are domiciled in the mountain and southwest regions. Colorado alone contains more than two percent of the nation’s businesses. Clearly, there’s no shortage of opportunity.

It isn’t difficult to see the disconnect in the amount of private equity investment in Colorado and the mountain region, both in terms of the quantity and the quality of businesses. However, private equity is smart capital and typically doesn’t lag for long. There is already a movement to have better coverage in the Rocky Mountain region and anecdotally, we have seen an uptick in the number of private equity firms looking for opportunities in the Rocky Mountain west.

Click here for more information on the Kauffman Foundation’s study on entrepreneurship by region.

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What Do Private Equity Firms Look for in a CEO?

A survey recently conducted by AxialMarket took a high-level look into CEO compensation and how private equity firms tend to approach it. Each of the five questions were decisively answered with a clear majority, showing an overall consensus among the respondents.

When asked what is valued more when deciding on a CEO, experience was the clear winner with more than three quarters of the vote. Career trajectory garnered just over 20 percent and education received no votes.

Respondents then overwhelmingly said that they would rather buy a company with a CEO, rather than bring one in. More than eight out of 10 private equity professionals would prefer a strong company with an established CEO. Less than 20 percent said that they would rather bring in outside help.

When it comes to CEO compensation, earnouts and equity were preferred above salary and other benefits, with nearly 90 percent of the vote. And when it comes to aligning CEO incentives, long-term equity was the clear preference over short-term financial, again with nearly a 90 percent majority.

Finally, AxialMarket asked about the average tenure of a CEO in respondents’ portfolio companies. About 60 percent said that three to five years was the average. One to three years and five to ten years came in even, with just under 20 percent each. Less than five percent of respondents said that average CEO tenure was less than a year, and nobody selected ten years or more.

The moral of the story here is that private equity groups look for a company and management team with whom they can partner. We often see companies who want a private equity group to pay a premium valuation and bring value to the table through a management team or high-level board direction. While this is a reasonable desire, it is not necessarily reasonable to expect value from a private equity group both in the form of consideration and its time and energy.

A valuable management team that is willing to stick around long enough to help the private equity group achieve its goals, is much more likely to achieve its own goals in terms of valuation. It’s a give and give relationship, so both can cash in at the end.

For more information, a summary of the AxialMarket survey can be found here.

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Private Equity Fundraising Hits Record Low

According to a recent article published by Reuters, a record number of private equity funds were seeking money from investors in the second quarter. However, economic conditions have slowed progress. The number of funds that actually completed fundraising in the second quarter was a record low.

When it comes to tying up their capital for an average of 10 years, investors are getting pickier. At the same time, tighter deal financing has made it difficult for fund managers to deliver large returns. According to the article, some investors, including banks, are leaving private equity altogether, or at least limiting the number of fund managers they work with.

According to data from Preqin, 126 private equity funds reached a final fundraising close in the second quarter. That’s the lowest number since Preqin began collecting data in 2004.

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Mezzanine Debt Providers Struggle to Keep Up With Opportunities

Deal flow for mezzanine debt continues to move along at a steady pace. Pipelines are so full, in fact, that providers are struggling to keep up and are not closing deals as quickly as they’re stacking up.

According to the KeyBanc Mezzanine Debt Quarterly Newsletter, capital levels remain high. Over 65% of issuers surveyed in the newsletter have more than $50 million in available capital and nearly two-thirds have more than $100 million. The amount of capital that is currently available is a strong signal for ongoing growth in deal flow.

Along with the available capital, leverage multiples are increasing across the industry. Additionally, more providers are willing to take on a second lien, showing a loosening in lending standards.

Overall, it appears that mezzanine debt is on track to continue increasing deal activity for the foreseeable future. Despite the fact that funds have struggled to keep up with the deal flow, the amount of capital available and easing lending practices indicate further growth.

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Buyout Multiples and Deal Flow on the Rise: The Time to Sell?

According to PitchBook, 2011 came to a close with buyout multiples nearly matching 2008 levels. Coming in at 9.1x EBITDA, this marked a sharp increase from 7.3x EBITDA in 2010 and a continued rise for two straight years.

At the same time, a recent survey of fund managers found that an increased investment of capital is to be expected in 2012. According to the Perspective Private Equity Study by BDO, 22 percent of fund managers expect to invest between $30 million and $50 million in deals and acquisitions during 2012.

This is a significant increase, up from just 10 percent of respondents a year ago. And 16 percent of fund managers surveyed said they would deploy somewhere between $51 million and $100 million in capital over the coming year, an increase from only 11 percent last year.

The sharp rise in deployed capital, along with pre-recession EBITDA multiples in private equity is an excellent signal for those looking to sell a business in 2012. The combination of pricing and increased deal flow means now is the time for private equity candidates to prepare for sale.

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Private Equity Buyouts in 2011

2011 brought an increase in buyout multiples, marking the second straight year of growth and exceeding 2006 levels, coming in at 9.05x EBITDA. Debt financing was accountable for much of that, at 6.2x EBITDA, with equity making up 2.8x EBITDA. Healthy balance sheets and a push for growth were two significant factors contributing to this trend.

 

Meanwhile, the leverage used on deals under $1 Billion dropped significantly in 2011, no doubt due to difficult access to leverage and an overall insecurity in the debt markets. Deals over $1 Billion on the other hand moved in the other direction, widening the gap between the two.

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Private Equity Deal Flow Continues to Increase

For the second straight year, the velocity of deal flow continues to rise among private equity firms. While still slower than in 2007, it shows a continued recovery from the bottom of the financial crisis in 2009.

In 2007, PE firms averaged a deal every 2.5 months. By 2009 that average had fallen to 4.8 months between deals. But in 2010 that number gradually improved to 4.1 months and so far in 2011, PE investors are averaging a deal every 3.6 months.

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Access To Growth Capital Tops Business Owners’ List of Issues

A recent study by Pepperdine University found that the top issue facing business owners today is access to growth capital. According to the study, 31 percent of business owners cited this as number one. The next highest issue was the economic environment at 27 percent.

While business owners expect a ten percent growth in revenue over the next year, the estimated revenue growth rates would jump to 25 percent if they were to receive additional capital.

In addition, the study asked business owners to compare the current environment to six months ago. Significant findings included 63 percent of owners reporting an increase in opportunities for growth, yet 40 percent reporting a decline in access to growth capital.

More than half of business owners reported an increase in competitive pressures, while 44 percent reported a decline in their confidence in the economy. Overall, more than 70 percent of respondents would expect an increase in revenue if they were able to access additional capital.

These findings were a part of the Pepperdine Private Capital Markets Study.

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2010 Brings Positive Deal Flow

Last year may not have been spectacular for the private equity industry but modest improvements and moderation marked an upward spin in 2010.

Though not the banner years of 2005 to 2007, last year marked a significant improvement over 2009. The upswing appears even better when you consider that a more moderate approach to leverage was used in 2010. Use of leverage was close to 50%, a much lower number than previous years.

In the continuing theme of moderation, fundraising also saw a dip in 2010 as private equity funds confronted nearly half a trillion in capital overhang. It wasn’t a barnburner, but 2010 showed a positive start to recovery.

 

 

 

 

 

 

 

 

 

 

 

(Source: PitchBook)

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