• Rob Tillman

Private Equity is Calling



Do you know someone who has become a leader in a PE-backed business? Chances are you have, and more likely than not, their story includes a wealth creation event that was truly life-changing. Would you like to find a similar opportunity?


The Numbers Tell the Story


As private equity has become a major force in reshaping businesses, many of us recall how too much debt nearly destroyed our financial system. Now, we're in the final stages of what will likely become the longest economic recovery in U.S. history, and taking a look at the last decade can tell us a lot. Here are some of the numbers behind the story for PE investors:


  • Leverage has returned to pre-crisis levels of 7X EBITDA

  • Valuations peaked at 10X EBITDA in 2007 and now approach 12X


With leverage and valuations at or above pre-crisis levels, concerns of a correction certainly have some merit. However, PE investors are in a much better position, to not only weather the upcoming downturn, but to benefit from it. Here's a look at some numbers that may tell us why:


  • Private capital dry powder exceeds $2 trillion

  • 67% of dry powder was raised over the last two years

  • $1.3 trillion has been raised for PE buyouts since 2014

  • 90% of LPs seek to maintain or increase their allocations to PE


PE investors are well capitalized and the LPs who invest in PE would like to allocate more money to buyouts. PE returns exceed all other investment categories, and the resilience of the market after the last downturn suggests the next buying opportunity is coming. In a downturn, valuations will fall and exits will not be as attractive, but the competition for deals will decrease as strategic corporate buyers simply won't have the stock prices to compete.


Follow the Money


PE investors are in business to make money, but where are they investing? While we all know about the big players like Blackstone which just raised a $26B fund, a total of about $300B will be raised in 2019 for PE buyouts. Huge deals will take place in the coming downturn or correction, but the majority of PE investing will continue to take place in the middle market. Consider these numbers:


  • 70% of all PE investments are between $25M and $1B in companies with EBITDA of $2.5M to $100M

  • The number of PE-backed businesses in the U.S. increased from 4,000 to 8,100 since 2007 while the number of publicly-traded companies decreased by 46% since 1996


While these numbers tell only part of the story, following the money tells us that PE investors are looking for solid middle market companies and leaders well suited to run them.


Middle Market Leadership Keys


So, what are the leadership skills and approaches that work best in middle market companies and working with PE investors? Let's take a look at the top five:


  • Industry Expertise. The old adage in recruiting leaders to private equity-backed businesses is to find a leader who knows the industry and has a proven track record. While great leaders are increasingly moving across industries, PE investors seek leaders who have been highly successful in a similar business.

  • Ownership Mentality. Frequently what makes a smaller company great is a committed owner who puts the success of the business and its people first. While a long-term view may conflict with short-term investment horizons, owners think about ROI and expense management differently than leaders with a big company mindset.

  • Data-Driven Decision Making. PE investors love data and transparency. After all, they've made a big bet on the company and want to see and understand how their investment is performing. Leaders must link key decisions to the right data and hold people accountable to deliver measurable results.

  • Time to Value. Speed. With the average holding period just below five years, leaders in PE-backed businesses don't have the luxury of time to make an impact and generate results. But this isn't just about moving fast. Leaders must know how to focus and align a company around the actions with the greatest potential to quickly increase a company's valuation.

  • Lean and Mean. It goes without saying that increasing a company's EBITDA requires effective cost control, but running lean is more than a financial strategy. Leaders in PE-backed businesses need to forge a "can-do attitude" and a belief that people can do great things when they work together and reduce bureaucracy.


What Should You Do Now?


If the idea of working in a PE-backed business is appealing to you, don't just wait for the phone to ring. Take these three steps:


  1. Do a thorough self-assessment of your skills and experience with a trusted advisor. You may think you know the answers but knowing how you're perceived by others is extremely helpful in developing your plan.

  2. Develop your leadership skills, approach and track record to fit a middle market company. Even if you're a leader in a much larger public company, this approach will help you make a greater impact in your current company while also making you more attractive to PE investors.

  3. Build your network with an understanding that PE investors are highly effective networkers. PE investors frequently work with advisors who fly under the radar, and we're all just a phone call away from someone who could be the key to your next opportunity.

© 2020 by TillmanPartners