Sat, Feb 25, 2017
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Private Equity Strategies

Dealmakers Q&A: Sellers May Be More Optimistic, But It’s Still A Buyers Market In Private Equity

Monday, December 02, 2013

By: Bailey McCann, Private Equity Strategies

Sellers in the lower middle market are starting to get more optimistic, but potential buyers are still remaining cautious according to Dave Moylan, Operating Partner & COO at Yennai Capital. New York-based Yennai Capital takes control equity positions in small to middle market US businesses with $10-100MM in revenues. Private Equity Strategies spoke with him about what makes a company stand out and where he sees opportunity moving into 2014.

“There is a lot more deal activity right now, but the number of deals that are actually closing show that there is still a misalignment of expectations between buyers and sellers,” he says.

Part of this separation between buyers and sellers is based on the more nuanced view buyers are taking of the market overall. Potential buyers are looking at more than just balance sheet and management. “As we start digging in and focusing on companies we’re looking at regional risk, competitive risk, not just management teams,” Moylan says. “For example, if a company has one customer for 60% of the revenue, we have to look at that knowing on day one what will that mean for us, especially if that relationship sees some tension. We also want to look at how we can diversify away from being a single customer business.”

When firms like Yennai do look at management teams, chemistry and work ethic define that evaluation. “We want to see the whole team pitching in, it’s the same as the customer base, if it’s one person why is it one person doing all the work? What can we do then on day one?”

For the companies themselves going into these transactions, Moylan reports that entrepreneurs are better advised and more realistic than they were during the frenzied years leading up to the crisis. “Owners are getting a little more savvy about what they ask for, they don’t want the costs to be as high or the time horizon to be as long. They’re asking for other things too like greater tax efficiency and employment agreements.”

The lower middle market is starting to get crowded as more funds look for ways to deploy capital, and still find high quality companies. As a result, players in the space are starting to see valuations tick up, but potential headwinds, like Fed tapering could make those valuations more expensive. “Bigger funds are starting to look at this part of the market, and you’re seeing valuations reflect that. If they pay a 4x or an 8x multiple it’s not a big deal relative to the check size they are used to writing.”

Opportunities in this part of the market are also regionally driven. “We’re looking at places like the west coast. California is interesting because of the size of the economy and the evolving regulatory environment there. Similarly, the upper Midwest is offering some opportunities in oil and gas, those economies will have to look at infrastructure and sustainability going forward.”

Some cities in newly formed energy markets have capped local development as state and local governments look at how local infrastructure will be impacted. “If you bring in 20,000 people overnight around oil it makes for a big demand on local infrastructure. Those trucks are heavier so roads come into question, housing is an issue and the businesses that follow right away are often check cashers, nightclubs, and convenience stores. If we’re looking at companies in those towns we’re going to want to see what those governments do on the regulatory side and are there more sustainable businesses coming in. Is there a Wal-Mart? Or grocery stores? That can be evidence of a longer term play.”

 
This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.
Private Equity Strategies
Private Equity Strategies
Private Equity Strategies
Private Equity Strategies


Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Legal - Fannie, Freddie shares dive after U.S. appeals court ruling[more]

    From Reuters.com: Shares of Fannie Mae and Freddie Mac tumbled more than 30 percent on Tuesday after a U.S. appeals court shut down efforts by hedge funds and other investors to pursue numerous legal claims accusing the U.S. government of seizing their profits following taxpayer bailouts. By a

  2. Institutional investors plan to raise allocations to alternative assets in 2017[more]

    Komfie Manalo, Opalesque Asia: A survey by Context Summits Miami showed that nearly 72% of institutional investors and family offices plan to raise their allocations to alternative asset managers this year, suggesting continued strong demand for the industry. "As many large, brand name f

  3. Comment - Mortgages, mergers and hedge fund fees, Fairholme's Berkowitz responds to court ruling against hedge fund suits of Fannie Mae[more]

    Mortgages, mergers and hedge fund fees From Bloomberg.com: Yesterday the U.S. Court of Appeals for the D.C. Circuit handed down an odd decision in a lawsuit over the government's nationalization of Fannie Mae and Freddie Mac. The key issue is what's called the "Third Amendment," the 2012

  4. Investing - Hedge funds continue to chase the herd in record Momentum wager, Marshall Wace bets grocer Sainsbury may need rights offering, Hedge fund net exposure has started to retreat, David Tepper's Appaloosa fund makes a huge buy, The 10,000-mile journey to Short Australia, Skeptical hedge fund investors grill Evan Spiegel about Snap's I.P.O.[more]

    Hedge funds continue to chase the herd in record Momentum wager From Bloomberg.com: Hedge funds can't get enough of momentum - even if it means embracing an investing strategy they hate. Loosely defined as betting on shares that went up the fastest over the preceding nine-to-12 months, h

  5. Opalesque Exclusive: Swiss investors take fund seeding and acceleration into their own hands[more]

    Benedicte Gravrand, Opalesque Geneva: Banque Bonhote, a 200-year old Swiss private bank, last year launched a community of investors - heads of Swiss family and advisory offices and wealth managers - with the aim of co-investing in the kind of managers they wanted to invest in, either by way of s