The days of guarded optimism are long gone, and the private equity community is almost universally optimistic. LBO volume in 2004 rose to an all-time high of roughly $136.5 billion, which is significantly higher than the then-record breaking 2003 tally of $94 billion. It may sound greedy to suggest that 2005 could be equally busy-let alone busier-but the smart money is on increased deal volume, purchase price multiples, exits and fund-raising.
“Everyone is optimistic about the direction of the market, and we share that optimism,” says Glenn Gurtcheff, a managing director with Piper Jaffray. “Deals are getting done more rapidly than they have been done in the past and there are lots more alternatives sitting in buyers’ inboxes.”
Peter Huff, a general partner with Blue Sage Capital, agrees that this year is going to be almost as hectic as the last, pointing to the public markets as evidence. In 2004, there were 55 buyout-backed IPOs (see story, page 24), which is more than was raised in 2001, 2002 and 2003 combined. “It seemed like in the second half of the year the IPO door swung open. It might be a less crazy next year as M&A people start coming back, but we’re still at an all-time high, and people are much more optimistic. The people who can get the proprietary deal flow and be disciplined about deploying capital are going to be the winners in 2005.”
While most firms are happy to be buying and exiting companies with much more ease than in years past, some pros wish their peers would use a little of the guarded optimism that was common in the beginning of 2004. “We’re seeing very high multiples being paid by private equity backed transactions. It will be interesting to see how these deals play out in 2009 and 2010,” says Doug Dossey, a principal with FdG Associates.
Purchase price multiples reached almost as high as almost 9x EBITDA in 2004 for larger deals, and there doesn’t seem to be any relief in sight. 2004 fundraising volume reached its highest levels since 2000, soaring to roughly $43 billion, making the $24 billion raised in 2003 seem like chump change. That capital is going to start being deployed next year. And, what’s more, there is about $110 billion of dry powder waiting in the wings.
Bruce Rauner, a senior principal with GTCR-Golder Rauner, warned during 2004 that all these good times could come back to haunt private equity firms. “We are back to the wild days of auctions being bid up, money chasing deals and firms paying high prices. Everyone is aggressive because there is all this buyout money.”
Curtis Glovier, a managing director with Perseus LLC, agrees that private equity pros should be cautious, but doesn’t deny that times are good. “As a private equity investor, I have seen purchase price multiples increase during the course of 2004. The increase is a function of improved economic conditions, a rise in lending multiples, and the significant amount of capital looking to be deployed. I suspect that 2005 will see more of the same. At some point the leverage party will end, but probably not in the first half of the year. Buyout firms will continue to look for new opportunities, either platform companies or add-on acquisitions, as opposed to spending their time fixing existing portfolio companies, as was the case in previous years. Sellers should continue to benefit.”
Indeed. Even in the small-market, buyout players are seeking out auctions now. One private equity player in the lower end of the middle market said, “If someone tells you they aren’t as least looking at the auctions, they are lying.”
Although there might be storm clouds on the horizon, most think they are far out in the distance. “Last year, the message was cautious optimism. We expected the market to improve. Now when we look back at what happened in 2004 and look to 2005, everything is going better than we had hoped and we have no reason to think it won’t continue in 2005. Deal flow is way up, and it’s definitely a seller’s market,” said Jeff Rosenkranz, a managing director with Piper Jaffray, and co-head of its middle-market M&A team.