Proprietary Deals In Demand, Survey Says –

After returning capital to limited partners, New England-based private equity professionals are most concerned with returning capital to limited partners and establishing proprietary deal flow, according to an M&A Outlook Survey being released tomorrow by the Association for Corporate Growth and Thomson Financial (publisher of Buyouts).

Forty-six percent of private equity professionals based in New England say that finding proprietary deals is their biggest priority, while firms are also concerned with overpaying for assets and positioning portfolio companies for exits.

Investors are putting a premium on proprietary deal flow, in large part because it is becoming more difficult to obtain thanks to an increase in i-bank representation of mid-market companies. Doug Newhouse, a managing director with Westport, Conn.-based Sterling Investment Partners, says that inside deals like Sterling’s recent buyout of Community Research Associates Inc. are becoming a rare breed. “Most companies are going to go through a process-not necessarily an auction, but a process-and there’s nothing wrong with that,” he explains. “Most companies you would want to own have some kind of investment banking relationship. These businesspeople are usually smart enough to have someone work with them to get them the best deal. The trend of hiring investment banks is increasing, not decreasing.”

Indeed, in 2000, 2001 and 2002, the percentage of sellers in the middle market that retained a financial advisor during the three periods was 28.7%, 31% and 42.1%, respectively.

“Never using an intermediary is just not realistic,” says John Connaughton, a managing director with Bain Capital. “It’s happening more and more. A firm can have an advantage of some sort like extra insight into the company that will generate value, but negotiating without any intermediary is just less likely.”

Private equity firms’ quest for proprietary deal flow undoubtedly stems from their need to deploy capital into solid deals. It’s no secret that a ton of money needs to be put to work, which gives sellers the leverage to insist private equity firms pay a premium. According to the survey, 75% of respondents say there is an excess amount of private equity capital available for investment, with 44% saying it is a little higher than it should, be and 31% saying it is much too high. Additionally, according to the survey, 85% of firms believe that the dollar amount of newly invested private equity and venture capital investments will increase during the rest of 2004. Needless to say, there is lots of cash chasing too few deals, making competition fierce.

One New England-based private equity pro said, “My general view on the current market dynamic is less one of too much capital (though that is an issue), but more that there is a rush of fund expirations happening at the same time (next two years). That, coupled with the lack of investment in the 2000, 2001 and 2002 years, makes for an overly competitive dynamic for good assets.”

However, Sterling’s Newhouse says that money can be put to work. “Is it the old days of 10 funds funding 100 companies? No, people have to work harder. But in the $750 and below range there are a lot of good companies available, you just have to look harder than you did before.”

Full results of the survey, which covers M&A and Private Equity, will be released tomorrow, May 25.