Friday, March 18, 2011

Industry Thoughts | ACG And Lobbying, Part III

Yesterday, David Toll, Editor-in-Charge at Buyouts, penned a piece on how ACG is putting together a mid-market PR campaign on how mid-market private equity firms are contributing to job creation in the USA. The site (click here), in Toll's view, is a waste of time and that it's not worth the effort to worry about what he calls an "unwinnable" PR battle.

Well, David, I absolutely disagree.

I've written a few posts about why ACG should have a lobbying arm or PR campaign for private equity firms. PE firms themselves had to push back against the growing moves from Congress (most recently via firms fighting the $150MM under management SEC registration legislation), and now that ACG (who has 3,300, or 23.5%, of its 14,000 members from private equity) is making a formal PR push focusing on middle market firms, it's a bright sign.

But what's important to recognize here is that something is better than nothing.

I've argued in the past that because the industry's PR machine was almost non-existent, when Congress sets its sights on the industry through implementing regulatory reform, firms were going to scramble and find backup plans themselves. The public has no clue what private equity can actually bring to the table in terms of restructuring companies, job creation, and actually creating some sort of value.
Hey, until the ACG's movement, the only type of PR going one was going to be Lynn Tilton's reality show. Do we really think that THAT'S going to leave a positive opinion on John Q. Public??

I believe that middle market (and lower-middle-market) PE firms are going to be the face of the industry over the next 3-5 years. Here's why:

  1. The lower-mid-market guys are included in this SEC legislation mess as the threshold in terms of capital under management is about $200MM. Plus, most of the firms I talk with have at least $100-$150MM under capital! One of the exceptions is L2 Capital, which was a spin-off from Milestone Partners, a firm that focuses heavily on lower-middle-market.
  2. If a growing negative sentiment from the public grows, it will lead to a populist movement from Congress that will slam heavier regulatory reform on the industry. I'm not confident that the government will be able to grow small and medium business jobs in the short term, and because companies of those sizes have the highest necessity for job creation, you can have PE firms who specialize in those types of businesses to come in and fix them up.
  3. With the credit markets opening up again, these mid-market firms are getting more access to capital. However, lower-mid-market and mid-market firms in general are known to be significantly more cautious in their investments, so you'll continue to see low-multiple acquisitions from them. 
  4. Mid-market firms majorly invest in companies in the US. They look to streamline operations and developing well-oiled machines. Besides, more and more firms are looking to talented 3rd  parties (e.g., turnaround experts, consultants) to help them fix their portfolios. Why now? Because they have the capital to pay for it again.

The private equity PR battle can be won. It's just that any voice lobbying for PE never existed before, and that if there was any organization that needed to spearhead it, it's ACG. The middle market is the future for PE, and by doing nothing to support it and educate the public, PE would be in for a hailstorm.

Again, something is better than nothing.

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