Monday, April 30, 2012

Industry Thoughts | One-ish Year Update

July 2011. Yikes. That was the last time I wrote in here. First off, sorry guys for the lack in posts. Right when I had promised a return to consistency, work gets crazy and the PE industry gets gut check after gut check by the media, Democrats, and the general public. 
But let's take a look at some key stories that happened the past 3 quarters...

THE ANTI-PE GUT CHECKS: From one jab to another hook, the industry faced an ONSLAUGHT of acrimonious words from the mainstream media and American public, getting terms like "vulture capitalists," "job killers," and executives that are basically, to put it bluntly, fornicating acquired companies to cut costs, "strip and flip" them, and sell at a profit, leaving the workers to fend for themselves. Hmmm, how wrong is this picture here? Maybe Dan Primack's "wicked smaht" friend can show you.
So, what's been the response to the gut checks: the PEGCC released a site, Private Equity At Work, that touches the postive effects that larger PE firms have been making. Moreover, ACG had two sides, the Middle Market Private Capital Leadership Forum and a recently released PE education piece focused on the middle market (which is really becoming PE's future). You also had many journalists attempting to educate their readers about private equity, how it works, and the pros and cons of it.
That's great and all, but the problem here is that we can get countless economists, execs, and portfolio company workers to provide useful information to educate, but it takes 1 Jon Stewart segment, or 1 "debate" on NewsHour (where the journalist who will not be named here basically tries to take over the program), or 1 angry anti-PE tirade to turn the public (which, by the way, is in a phase of "Generation Pissed Off" and would be happy to find a way to skewer the financial services industry) more towards anti-PE.
It won't matter about the Stewart Weitzmans they're buying, the Huddle Houses they're eating at, or the countless industrial companies that provide things from power to 3D technology through Real3D, the anti-PE battle will continue on until one prominent and influential source can step up and explain what the industry is REALLY doing.
We need less Josh Kosmans and more David Snows.

PERFORMANCE IS KING: From strategic buyers still remaining a constant threat to higher multiples along with LPs clamping down on terms and conditions, the future of PE (the mid- and lower-mid-markets) is working to stay innovative on deal flow and operational improvements. Why? Because they need to show the pure performance off to their investors.
LPs are pushing PE to hire more Operating Partners (or people who understand operations and strategy improvements more, the LEKs, Gotham Consulting Partners, Parthenons, and 3rd party firms of the land) to handle day-to-day operations. PE is also taking a personal initiative to be more conservative and smart in their investments. Moreover, with the middle market and lower middle market divisions making more deals (Pitchbook determined that 3 out of 5 deals in the past decade were middle market-focused), we should still continue to see more careful deal flow coming out of the industry (albeit with higher multiples thanks to some overpaying that no doubt will happen from firms flush with cash/dry powder and a need to use it soon before terms run out).
Then we have survival of the fittest. Time is running out for many firms to use up capital and deliver strong IRRs. While some firms are able to snap up capital for new funds in a matter of weeks (some even getting it within 10 weeks!), others will struggle and get tens or hundreds of millions of dollars lower than what they expect. Does this stink? Of course it does, especially as LPs apparently have $1/4 trillion to spend on PE but hold it back.
When the future of PE is securely mid-market, expect the faucets to open up again. We're partly seeing that right now.

OPTIMISM: I don't think I've seen any other industry within financial services that has more optimistic dealmakers than PE. I recently returned from ACG InterGrowth 2012 and caught up with a lot of my colleagues in the industry. The two big things I got from everyone were:

  • We are BUSY with deals and books to read through, and
  • We may not be as busy as we like, but things are really starting to pick up.

Even with the doom and gloom of media pieces being put out there, PE is looking up and towards the sky. Heck, even PE is hiring again!

I am not worried about the industry moving forward into the election this November, even with the gut checks here and there. Besides, one happy middle market PE firm that I know quite well, Monomoy Capital Partners, is getting some fun time in the press, though Bloomberg Businessweek almost made the entire a boneheaded decision with its choice of cover. (Really, guys??) What BB is not hammering on though is that WHAT THEY ARE DOING IS NOT AN OUTLIER. Where is Jay Jordan, Riverside's Pam Hendrickson, or heck even CARLYLE when you need them for backup?

You also have to remember that Obama has been pushing the Small Business Investment Company (SBIC) program, also trying to make the head a Cabinet position, and lots of mid-market firms are applying for funds within it with the focus to help small businesses. That also explains the subdued attack by the Obama campaign on PE; their target isn't the industry, it's Bain Capital. (Also, you can't forget Obama's strong relationships to key PE execs, one publicized one being Blackstone's Tony James.)

I briefly touched three key drivers of PE's evolution through the past 12-ish months. I also have that optimism shared among execs, as the industry gets more out in the open through SEC registrations, the JOBS Act, and a growing desire among GPs to share information about funds to investors and even the public. Private equity is coming out of its off-the-radar style and slowly rolling out into the sun. When it finally becomes entirely exposed for all to see, we all will know how actually useful and beneficial it is for our economy and businesses small and large.


Private Equity Jobs Frankfurt said...

First I don't have any idea about Private Equity, but thanks for this site because with this I clearly understand it. Many thanks!

cisdeepak said...

I think you are right that the size of the firm is going to play a big role in 2011. And it will create so many M&A Jobs.