Top Trends in Middle Market Private Equity
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Top Trends in Middle Market Private Equity Harris Smith, MP Private Equity and Strategic Relationships December 9, 200 - PowerPoint PPT Presentation


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Top Trends in Middle Market Private Equity Harris Smith, MP Private Equity and Strategic Relationships December 9, 2008. Top Trends. Impact of credit crunch Explosion of cross-border M&A Proliferation of operational partners Emergence of sovereign wealth funds

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Top Trends in Middle Market Private Equity Harris Smith, MP Private Equity and Strategic RelationshipsDecember 9, 2008


Top trends
Top Trends

  • Impact of credit crunch

  • Explosion of cross-border M&A

  • Proliferation of operational partners

  • Emergence of sovereign wealth funds

  • Middle-market compensation squeeze

  • Three hot sectors for investment

  • Natural evolution of private equity firm


1 impact of the credit crunch
1. Impact of the credit crunch

  • August 2007, credit markets began contraction

  • Slowdown in M&A activity

  • M&A activity for large deals decreased more than middle-market deals

  • Likewise, middle-market private equity investments decreased less than largest buyouts in first half of year

  • PE firms moving downstream doing smaller deals requiring little or no leverage

  • Mezzanine debt has become more prevalent

  • Strategic buyers now more competitive


2 explosion of cross border m a
2. Explosion of cross-border M&A

  • Cross-border deals increasingly important for large middle-market PE firms

  • Reasons:

    • Geographic diversification

    • Good acquisition candidates outside US

    • Portfolio company outsourcing

    • Consumer growth in emerging markets

  • Cross-border M&A has grown dramatically over last decade

  • Middle-market has become increasingly involved


2 explosion of cross border m a1
2. Explosion of cross-border M&A

  • ACG-Thomson Reuters Mid-Year 2008 DealMakers Survey:

    • 28% of middle-market firms did cross-border deal in first half 2008

    • 55% say will do cross-border deal in next six months

    • 40% say cross-border deals will become more important to their firms

  • Private equity deals outside of the US by US firms reached highest level in 2007, $194 billion

  • Trend expected to continue


3 proliferation of operational partners
3. Proliferation of operational partners

  • A competitive edge in deal flow

  • Sector expertise

  • Added value to portfolio companies, best practices

  • Work with management, or replace them if necessary


4 emergence of sovereign wealth funds
4. Emergence of sovereign wealth funds

  • Growing in size and influence

  • U.S. investments popular: political stability, transparency

  • Provided much-needed capital, but recent pullback

  • National security questions: Dubai Ports World

  • SWFs estimated at more than $2.5 trillion

  • SWFs could eventually invest in middle-market firms


5 middle market compensation squeeze
5. Middle-market compensation squeeze

  • Widening pay gap between largest buyout and middle-market firms

  • Smaller pay increases at smaller firms

  • More funds mean more options for associates

  • Recruiting, retaining talent tougher for smaller firms

  • Faster path to partnership helps small firm recruiting


6 three hot sectors for investment energy healthcare technology
6. Three hot sectors for investment: Energy, Healthcare & Technology

  • Energy

    • Growth opportunities fueled Q1-Q3 dealmaking

    • Credit crisis, drop in energy prices have slowed M&A

    • Long-term outlook positive

    • Alternative energy especially promising

    • Fragmented industry

  • Healthcare

    • Pharma, biotech and medical devices lead active year

    • Growth sector – baby boomers

    • Historically recession-resistant, but not immune to downturn

    • Risks: changes in regulations and reimbursements

  • Technology

    • Ranked 1st in the U.S. and 2nd globally in number of deals Q1-Q3

    • Significant slowdown in fourth quarter

    • PE tech firms have cash on hand but credit crunch hampering dealmaking

    • SaaS and Cleantech are bright spots


7 natural evolution of pe firms
7. Natural evolution of PE firms

  • Blurring of line between private equity, other asset classes

  • Largest firms diversifying into different sectors, hedge funds

  • Easier for LPs to invest in fewer firms with multiple fund types

  • Coming consolidation

  • Specialization for smaller firms

  • Some skepticism among middle market firms


Conclusion
Conclusion

  • Private equity ever-changing asset class

  • Private equity maturing

  • Savvy private equity investors re-inventing business

  • Large PE firms continue to enter middle-market

  • Private equity remain attractive to LPs, employees, companies


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