“What’s with these private equity firms who keep banging on my door?” executives of mid-sized companies kept asking accounting giant Deloitte & Touche. So the firm decided it was time to conduct a survey of buyout shops and figure out what they are looking for in middle-market companies.
D&T sought out 269 senior private equity executives, and called the survey “Behind the Curtain: What mid-sized (under $1 billion) private equity companies need to know about what drives private equity investments.” The survey, D&T hopes, will help reveal the industry to the average middle-market company, showing them how to preen themselves for buyout shops and what they can expect after a sale to one.
Among the main findings: a company’s growth prospects are much more important to a buyout shop than its current profitability. About 75% of buyout shops said that lack of growth prospects was often the reason they did not complete a deal, and 90% said that it was a top reason they wouldn’t submit a bid.
The other top reasons for not completing a deal were the lack of achievability in the business plan and a high price. The quality of the entire management team, not just the CEO, is important to your typical buyout pro, the study found. In fact, the quality of an individual CEO or president rated very low in importance.
As for incentives for management, 47% of buyout pros say they set aside between 5% and 10% of equity for management. Twelve percent say they set aside 15% or more and only 7% offer less than 5%. D&T also asked buyout shops what industries they would be most active over the next twelve months. Life science/health care tied with energy for the top slot, followed by telecommunications/media/technology.
“We have CEOs and owners calling us asking, ‘How does [private equity] work? Is this for real?” says Andrew Isgrig, a managing director for Deloitte & Touche Corporate Finance, the investment banking division of the firm. “A couple recent articles were pretty negative about private equity, and about how buyout firms make changes to upper management or take excessive dividends.”—M.C.