PE trends

1. GLOBAL PRIVATE EQUITY TRENDS IN
THE 1ST QUARTER OF 2013
Ramkumar Rajachidambaram
This document explains the trend in the deals completed
in the early months of 2013.There has been a decline in
the deal volume and the valuation in the private equity
environment. The reason behind this is explained in the
white paper below

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GLOBAL PRIVATE EQUITY TRENDS IN THE 1ST
QUARTER OF 2013
INTRODUCTION
There is a famous explanatory quote from the famous detective Sherlock Holmes – “The dog that didn’t
bark”. The quote essentially means that for the mystery to be solved, one should pay attention to what
didn’t happen as well as to what did. This quote is very much relevant to the current state of the
Global Private equity environment
For the fourth quarter ending 2012, research shows that 183 private equity firms reported 92
completed transactions in the $10 million to $250 million Total Enterprise value (TEV) range. This
upsurge of activity which was clearly driven by individual business owners anticipating an increase in
federal tax rates did not carry over into the early months of 2013. For the first quarter of 2013, the
same set of firms reported 14 deals.
The limited partners and the deal partners of the Private Equity firms suggest that the M&A activity is
picking up, but that the basic financial levers like economic growth, key sector strength, corporate
performance, public stock prices, capital available to buyers suggest that the market would become
more vigorous than what is experienced now.
DECLINE IN THE DEAL VOLUME
The deal volume continues to decline and lag behind. The main reason behind this decline is because
most of the deals not getting done. These deals are subjected to two influences, the first easier to
measure than the second:
1. The ephemeral effect of tax-minded sellers not able to freeze the deal by year-end pulling
their businesses from the market once the anticipated benefit of a pre-year end closing was
lost.
2. The continuing effect of more business sellers walking away from transactions where initial
indications of value satisfactory to them were diminished by prospective buyers following due
diligence
Let’s measure the first then talk about the second.

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Since the middle of last year, the private equity buyers were asked to identify the nature of the
selling/target entity as individual/family, PE/financial or corporate. The analysis from this data shows
that, the majority of individual/family sellers jumped in the fourth quarter, probably reflecting
concerns about expected increases in federal tax rates.
Prior to the fourth quarter, these non-institutional sellers accounted for about 59 percent of deal
volume. For the fourth quarter, it was 78 percent. At the same time, overall multiples fell from the
mid-to high sixes earlier in 2012 to 6.0x trailing twelve months (TTM) adjusted EBITDA in the fourth
quarter.
This activity is described as “buyers’ tribute” where the concessions are extracted from target sellers
unwilling to jeopardize closing before year end. The valuation data in the first quarter corroborates
that the aggregate valuations have not declined, and that the market for desirable properties remains
quite strong. Valuations on businesses sold by individuals and families continued to slide to an average
mark of 4.9x, while the average for companies with corporate or private equity sellers improved to
7.1x.
Hence the PE environment challenged with the external consideration of expected tax changes, the
non-institutional business sellers fell into one of three groups:
1. Sellers who got deals done by year end and accepted modestly lower pricing overall as an
offset to the tax benefit.
2. Sellers with weaker business prospects (in aggregate) who did not get their deals done by year-
end, but closed in the first quarter and accepted markedly lower pricing.
3. Sellers with stronger business prospects (in aggregate) who didn’t close by year-end, pulled
away from the market, went back to building business value.
In the absence of a countervailing incentive like avoiding tax increases, individual business sellers are
much less likely to reduce their valuation expectations.
EFFECT OF DUE – DILIGENCE IN THE DEAL VALUATIONS
The another section of non-barking dogs which are equally important are the sellers whose deals are
priced in the early stages of the deal and then falling apart when the business owners refuse to accept
post-letter of intent adjustments in purchase price.
The sale process – essentially the negotiations that happen in the front end has improved considerably
in the last 5-10 years due to the involvement of the intermediaries. These intermediaries represent the

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sellers (individual/family owned) and hence able to structure a deal more attractive. So, the result of a
competently managed process is often a sweetened initial valuation. Hence it becomes all the more
imperative that there is a sharper incentive for financial buyers to make sure that the business is as
advertised once they are in later stage due diligence.
During the private Equity deals, the buyer performs the quality of earnings analysis or other due
diligence, identifies reductions in EBITDA or other concerns, and is prepared to proceed, but only at a
lower valuation. The ensuing discussion between investment banker and client is never a good one.
Emotionally, the client persuades the buyer to accept their price. If the short-term situation for the
company and the owners can support it, they often will.
CONCLUSION
The standard of practice in the advisory end of the Private Equity industry needs to change, and it is.
Steve Brady, Grant Thornton’s partner in charge of transactions services says, “Over the past year or
two, we’ve seen an explosion in more sell-side due diligence being undertaken earlier. It’s now
individually owned businesses as well as the PE-backed companies.”
Better M&A practitioners are bringing preemptive due diligence and valuation defense onto an equal
footing with front-end marketing and stimulation of initial indications of interest. These interventions
can be an indicator in future whether deal volume picks up, with the narrowing of this disconnect as a
contributing factor