middle market

E&Y Study Shows Private Equity Backed Companies Crushing Public Markets

A new study released by Ernst & Young examined 539 Private Equity deals that exited from 2006 to 2012.  These are my key takeaways from the study:

  • PE backed firms crushed public companies and have done quite well in spite of the recession.  The PE exits from 2006 – 2012 outperformed investor returns on publicly held companies by a multiple of 5.4 over the same period.  For PE exits from 2010 – 2012, many of which were entered into prior to the recession, annual EBITDA growth averaged 11.8% compared to 5.5% in public markets.
  • Organic revenue growth is increasingly the primary driver of growth in EBITDA.  For PE exits from 2010 – 2012, organic revenue growth (as opposed to EBITDA growth through acquisition or cost-cutting) accounted for 45% of the growth in EBITDA versus 39% in the pre-recession years of 2006-2007.  In 2010-2012 alone, organic revenue growth accounted for over 50% of the growth in EBITDA.
  • Multiples, which were depressed during the recession, have rebounded.  For PE exits from 2010 – 2012, EBITDA growth accounted for 70% of the PE returns with the other 30% being from increasing multiples.
  • Holding periods are up.  For PE exits in 2012, the average holding period was 5.1 years, up from 3.4 years in 2006.

Here is the link to the full study: EY PE Study 2006 to 2012

The National Center for the Middle Market’s 2013 Q2 Middle Market Indicator

d6arbkvd9cf095iaaq9o_biggerDespite sluggish M&A activity, the National Center for the Middle Market’s 2013 Q2 Middle Market Indicator report shows solid growth with optimism and hiring on the upswing.  For the full report, click the link below:

2q_13_mmi

Middle Market driving job growth

Per Bureau of Labor Statistics data, businesses with between 50 to 1,000 employees generated the biggest job gains between March 2011 and March 2012. In fact, the 1.8 million jobs these firms added over that period accounted for more than half of all new jobs and more than five times the number of jobs created by companies with 1,000-plus employees.

Deloitte’s Tom McGee praises the middle market in article for Forbes

Deloitte’s Tom McGee praises the middle market in article for Forbes

Deloitte’s Tom McGee talks about the middle market in an article for Forbes.  The success of middle market companies stems from their ability to be nimble, McGee states. Operational costs tend to be lower, and smaller companies have greater flexibility and hands-on management. McGee said many mid-market companies also tend to be entrepreneurial, a positive point highlighted by another Deloitte survey that showed that entrepreneurial mid-market companies experience greater worker productivity and generate higher profit margins. “All of this evidence, in my view, points to a cross-section of the economy that is most likely to explode once our nation’s economy starts to shift to its potential growth rate,” McGee argues.

Seven tips for interim CFO’s of private equity portfolio companies; tip 6 of 7 – Be a do-er

This is part five of a seven-part series of tips for interim CFO’s at companies in the portfolio’s of private equity groups.  These tips are intended for financial professionals who already have the skills and experience to be a successful CFO at a typical mid-market company.  They specifically address the differences between being a CFO at a typical mid-market company and being an interim CFO at a growth-oriented mid-market company in the portfolio of a private equity group.

Tip #1: Be an ambassador

Tip #2: Be the advance team

Tip #3: Understand the exit strategy

Tip #4: Get to know the portfolio

Tip #5: Be an agent of change

Tip #6: Be a do-er

Think of yourself as more than just a consultant.  You are not there merely to assess the situation and make recommendations.  You are there to get things done and you may have little help so you need to roll up your sleeves and get to work.  Not only is this often the only way to get the job done, the client will like and respect you for it.  If you follow tips 1 through 6, you will have the foundation to be effective as an interim CFO at a private equity portfolio company.

Seven tips for interim CFO’s of PEG portfolio companies; tip 5 – Be an agent of change

This is part five of a seven-part series of tips for interim CFO’s at companies in the portfolio’s of private equity groups.  These tips are intended for financial professionals who already have the skills and experience to be a successful CFO at a typical mid-market company.  They specifically address the differences between being a CFO at a typical mid-market company and being an interim CFO at a growth-oriented mid-market company in the portfolio of a private equity group.

Tip #1: Be an ambassador

Tip #2: Be the advance team

Tip #3: Understand the exit strategy

Tip #4: Get to know the portfolio

Tip #5: Be an agent of change

You are not there merely to maintain the status quo or fill in the gap between permanent CFO’s.    The company probably does not have adequate budgeting, forecasting or financial reporting in place.  They may not have been audited and their tax strategy may need to be overhauled.   You may need to implement radical changes, but you need to do it in a way that is respectful to the folks who built the company that way.  Help them understand that their efforts helped the company get where it is today, but changes need to be made to get to the next level.  Embrace your role as an agent of change.

Middle market companies need CFO’s who lead with conviction

A recent article by Robert Steven Kaplan in the Harvard Business Review titled Leading with Conviction shows how great organizations are built on people who act like leaders and speak up even at the risk of sounding stupid.  This is particularly important for CFO’s at high-growth middle market businesses.

Tough transition for CFO’s from Big Business to Middle Market

CFO’s who have been successful in high level financial positions at large organizations often have a difficult time adjusting when they become a CFO at a middle market company.  A recent article in CFO magazine by executive recruiter John Touey titled “Why CFO’s fail in moves to small companies” explores some of the reasons why and lists some of the attributes shared by those who have made the jump successfully.

Seven tips for interim CFO’s of PEG portfolio companies; Part 1 of 7

This is part one of a seven-part series of tips for interim CFO’s at companies in the portfolio’s of private equity groups.  These tips are intended for financial professionals who already have the skills and experience to be a successful CFO at a typical mid-market company.  They specifically address the differences between being a CFO at a typical mid-market company and being an interim CFO at a growth-oriented mid-market company in the portfolio of private equity group.

Tip #1:  Be an ambassador

Think of yourself as the U.S. ambassador to a foreign country where the PEG is in the role of the U.S. government and the company is a developing nation.  The citizens of this country (aka the company’s employees) will think of you initially as an imperialist American pig or, in other words, an extension of the PEG.  You need to convince them you have dual citizenship.

  • They will be a little nervous and they have good reason to be.  They know some of them will lose their jobs or will be reporting to someone new.  They need to understand that it is also a tremendous opportunity for career advancement.  Communicate the following points:
    • The company will be growing rapidly and careers can grow with it.
    • Key employees who make the cut and demonstrate the ability to make a difference often get equity participation or other financial incentives.
    • PEG groups are very well connected to lots of great opportunities and reward good people, even if they leave the company, provided they exit on good terms.
  • They will be defensive.  Don’t ask them why they did something the way they did.  They probably did it that way because it seemed like the best idea at the time.  Instead, pitch alternatives to them and let them know how much you appreciate their input.
  • They will be eager to learn.  Teach.  People are highly motivated when they are learning new skills every day.  Share what you know.  You are there for a short time and your direct impact is limited, but if you leave your knowledge and experience in the hands of the key employees you leave behind, you can have an unlimited impact.
  • Help them understand the differences between a PEG portfolio company and a typical founder-owned business, which is discussed on this website and will be further explained in steps 3-5 of this series.