Intermediaries, Auctions In High Demand, Survey Says –

The competition among private equity firms is fierce and investment banks are reaping the benefits. According to a new survey released today by Thomson Financial and the Association for Corporate Growth, 50% of firms said that their primary method of sourcing transactions is through an intermediary. That’s up from last year, when only 40% of pros surveyed said they relied on intermediaries to source deals. What’s more, 51% of pros said they see deals going to auction.

“It’s not that surprising that intermediaries provide the largest source of deal flow. Sellers have gotten much savvier. Using expertise is very important for getting a good price and for managing the terms of a deal,” said Hiter Harris, a co-founder of Harris Williams & Co. “There was a stigma surrounding intermediaries. The thought was without an intermediary you can get a better price, but the truth is that the returns from a deal done with an intermediary may not be that different than from a deal done without one.”

There’s no doubt that part of what’s creating the record number of LBO transactions and that demand is the excess amount of capital available for investment. About 70% of respondents said that the current amount of private equity capital available is either much too high or a littler higher than it should be. Only 19% felt that there was an appropriate amount of capital available in the marketplace.

“Everyone needs to get deals done right now, there’s no question. But we live in an ever-increasingly efficient marketplace, and the opportunity to get outsized returns are not as plentiful as they were in the past,” said Glenn Gurtcheff, a managing director and co-head of Middle Market M&A at Piper Jaffray. “To put this money to work, people are going to have to participate in auctions, and anyone who says they won’t won’t see that many deals. The highest quality opportunities come through intermediaries.”

However, intermediary popularity doesn’t mean that firms should stop working the phones and relationships. Of firms that did win at an auction, 30% said they won the deal because they had a pre-existing relationship with the company and its management team, compared to 22% said they had won because they paid the highest price.

“Having a relationship with us is important, and having a relationship with the seller could be important. Knowing a company itself is a hit or miss. Sometimes cold calling companies encourages them to hire firms like us. And you get a certain amount of assurance when doing a deal with us. If we take on a deal, we have faith it is a quality company, the buyer has confidence they have a true seller, and the information presented is really organized. It’s a relatively painless way to learn about a company and make a judgement on it,” said Harris.

Mark Jones, a partner with private equity firm River Associates, also sees the benefit in using an intermediary even in the smaller end of the market. “If you use an intermediary the good news is there is a higher chance that the seller is motivated, you have fewer surprises and the seller has realistic value expectations,” he said.

In other findings, a whopping 72% of dealmakers said the M&A environment is good or excellent, which is up from 45% the year before. Perhaps even more optimistic, 87% of respondents expect the deal environment to be even better in 2005. Only 2% of respondents characterized the M&A environment as poor.

“Everyone is optimistic because if you’re not, you’re out of it. But I can’t see how it can get more optimistic than it is now,” said T. Patrick Hurley, ACG president-elect for 2005 and managing director of MidMarket Capital Advisors. “People want to find companies that don’t have every drop squeezed out of them and it’s hard, so I sort of share the optimism.”

For full survey results please go to