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

New section 336(e) regulations could simplify #PEG investments

On May 10, 2013 the SEC and IRS passed final regulations under section 336(e) that provide basis step-up opportunities for non-corporate acquirers.  The new regulations provide an opportunity for a Private Equity Fund (PE) to acquire a target and receive a basis step-up and tax shield, without creating a purchasing corporation or otherwise restructuring the target prior to the acquisition. Further, a PE now has the flexibility to restructure the target such that the ongoing activity is conducted through an LLC taxed as a partnership, which would allow the fund to pass on a full basis step-up upon exit and eliminate future corporate taxation on the target’s activities. In addition, the new regulations may provide the ability to separate multiple businesses post-acquisition in a much more tax-efficient manner than previously existed, thereby allowing a PE to better align its investments.

The full article from McGladrey can be found here.

Poll: Will the #JOBS Act and #Crowdfunding create the next Steve Jobs or the next Bernie Madoff?

The legal restrictions and expenses related to raising capital can be prohibitive for many small to middle market businesses.  The Jumpstart Our Business Startups, or JOBS Act would revolutionize the process of private capital raising through the legalization of “Crowdfunding”.  Although President Obama signed the JOBS Act into law in April 2012, the SEC still hasn’t published the final regulations required for the law to take effect.  The regulations will put a limit on the total amount eligible to be raised ($1 million), the total amount eligible to be sold to any single investor ($2,000 – $5,000 for investors with a annual income and net worth below $100,000, or up to $100,000 for wealthier investors). The issuers will need to file with the SEC and provide the investors with certain disclosure information and the transaction will need to be conducted through a broker or funding portal that complies with the SEC requirements.

The JOBS act will make it easier for small to middle market businesses to raise capital which will jumpstart innovation and job creation.  It will also open up new and potentially very lucrative investment opportunities to unaccredited investors.  On the flip side, these investments are risky and require a level of financial sophistication to evaluate so the JOBS act could result in unaccredited investors getting ‘swindled’ out of money they can ill afford to lose.

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.

Seven tips for interim CFO’s of PEG portfolio companies; part 4 of 7

This is part four 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

Tip #2:  Be the advance team

Tip #3:  Know the exit strategy

Tip #4:  Get to know the portfolio

The strategy of a company in the portfolio of a PEG may be related to other companies in the portfolio, so get to know the other companies and their CFO’s.  Situations that present a win-win situation for two companies in the same portfolio are particularly advantageous.  Do not hesitate to help the other sister-companies when requested or to seek assistance from the other companies when needed.   Opportunities range from sharing advice on vendors and customers, or sharing policies and procedures to sharing employees, cooperative marketing or even joint ventures.

Help other employees understand how the portfolio may impact the company’s strategy and how helping the sister companies can help their company and even benefit them personally when their efforts are reciprocated, which they usually are.