The Midwest: A New Technological Frontier

As reported in TechCrunch, the Midwest is no longer just a flyover space for high tech proprietors and investors flying between Silicon Valley and New York city. The Midwest has become a bastion for high tech startups in addition to the regions more traditional manufacturing entrepreneurship. Mark Kvamme, a co-founder of the Midwest’s largest — and most recent — venture investment firm, Drive Capital, recently said that, “In the last five years there have been 52 companies [from the Midwest] that have either gone public or been acquired for north of $1 billion." Recently, Sprint invited a group of 10 mobile-health related startups to its accelerator program based in Kansas City. Earlier in March, the Digital Sandbox KC released information stating that it had raised $7 million in follow-on funding for graduates of its accelerator program. Regardless of previous geographical prejudices, the Midwest is now a must visit for tech investors looking for the next big thing. Kansas City continues to lead by example through amazing entrepreneurship programs like Google's Fiberhood and the Kauffmann Foundation's numerous initiatives. Read the entire story from TechCrunch here.

Larger Players Squeeze Mid Market PE Firms

As reported in the Wall Street Journal, it is a difficult time to be a mid-market private-equity firm. Larger competitors, a seller's market and high valuations are combining to create a difficult atmosphere for smaller firms. “We have been getting blown out of the water on bids. Everything is going to auction, that wasn’t the case 10, even five years ago.” said Stratton Heath, partner at Oak Hill Capital Partners, this past Friday. Traditionally, PE firms could come in and make a bid that was persuasive enough for a company to not need to consider an auction process, but sellers are becoming more and more selective.  This also could lead to buyer's remorse; if you're paying top dollar to win a bidding war for a middle market firm, you'd better be right. Read the entire article here.

KPMG: Deal Activity in 2014 Expected to Improve

KPMG recently released the results of a survey given to over 1,000 deal makers with regards to 2014 M&A prospects. In short, deal activity is expected to improve in 2014. However, 2013 was also heralded by many as the year that would see M&A really take off and it didn't quite come to fruition.  Several mega-deals notwithstanding, 2013 fell short of expectations. So what makes 2014 different?   According to the survey, deal makers felt relatively positive about the environment and 63% of respondents said they planned to be acquirers in 2014. Most of this optimism was the result of large cash reserves, favorable/available credit terms, improving equity markets and improved overall confidence. However, as one investment banker put it, deals should most likely increase "because next year can't possibly be as bad as this year." This is where the questions really start. Many of the economic drivers present at the beginning of 2014 were also present in 2013. Private equity has piles of dry powder, corporate balance sheets are stocked with cash and money is cheap to borrow. However, all of these factors were also present in 2013. Instead of an increase in overall activity, we saw an increase in PE exits. So why would activity suddenly increase? According to the results below, most respondents expected targets to "become available." From our experience in the market, there are plenty of motivated buyers, but quality companies wanting to sell have been scarce. If this situation changes in 2014, the activity will most likely be very high. Some companies that we've spoken to have been anxious to eclipse pre-recession levels before having a liquidity event. Others are optimistic about the market in general, and want to leverage their growth opportunities utilizing cheap borrowed capital. The latter of those reasons won't change in 2014, but if some companies reach their targeted EBITDA numbers, sales could increase.   Click here to read the full report from KPMG. Hopefully, the conclusions drawn from their survey will come to fruition and 2014 will be a "solid" year.

Pitchbook PE Deal Multiples Show Deal Multiples for Small Deals Falling

November 14, 2013 09:47 by Clayton Reeves in Capital Markets, Financing, M&A, Private Equity  //  Tags: , , , , , ,   //   Comments (0)
As reported by Pitchbook, PE transaction multiples were reasonably steady in Q3 2013. However, deal size showed significant changes. For example, median enterprise value (EV) for small deals (EBITDA<$25 million) fell from 5.0x in Q2 to 2.5x in Q3. On the flip side, EV/EBITDA multiples rose to 10.7x for transactions of $250 million or more, while revenue multiples fell to 1.7x, the lowest in over two years. So, what does this mean for the market? It means PE firms (and the market in general) continue to pay for profitability over pure sales. Market participants definitely want revenue growth, but they also want healthy margins and solid business models. Since companies with both are rare, PE firms continue to pay a premium on larger transactions. There is generally still no rush towards companies that show revenues, but lack profits, unless the growth story is compelling (i.e., Twitter).  Key statistics from 3Q 2013 explored in this report include: Median EBITDA multiple:6.81x Median debt percentage: 50% Average time to close a deal: 13 weeks Read the full report here.

VC Valuation and Trends: Seed Series Rise, Most Other Rounds Fall

November 6, 2013 10:19 by Clayton Reeves in   //  Tags: , , , , , , , , , ,   //   Comments (0)
As reported by Pitchbook, the median pre-money valuation financings in 3Q 2013 fell across the board. The exceptions were Series Seed and Series C, both of which increased to new record highs. Valuatons have been trending higher for the last several years, but it had historically been most pronounced in later stage rounds (Series D or later). However, as we discussed several weeks ago, seed valuations are now skyrocketing, as well as Series C. As you can see above, the deal volume and capital invested has been relatively stable since mid-2012 after a volatile period from 2011 through first half of 2012. Read the entire report here.

Q2 2013 Private Equity Industry Trends

August 13, 2013 12:17 by Clayton Reeves in Capital Markets, Healthcare, M&A, Private Equity  //  Tags: , , ,   //   Comments (0)
McGladrey and PitchBook have reported private equity activity broken down into four sectors: business products & services, consumer products, health care and information technology. B2B: This industry continued to slow down in Q2 2013, with only 95 PE deals completed, totaling $11.0 billion. To put this into perspective, these are some of the lowest numbers in the last decade. Consumer Products: Continuing the trend from B2B, consumer products also slowed to the pace of frozen molasses, with PE completing just 64 deals during Q2.  Again, for perspective, this is the lowest quarterly total in more than a decade. Like other parts of the M&A market, the dollar amount ($31.2 billion) doesn't look too bad until you take out the megadeal for Heinz ($23.2 billion). Health Care: In an industry that has been expected to provide high deal flow, health care failed to live up to the hype.  PE managed only $4.1 billion of investment across 37 transactions. This proved to be the slowest quarter for deal flow since Q3 2009. Information Technology: Breaking the negative trend in PE activity, IT saw an increase in deals from Q1. Private equity invested $12.5 billion across 65 deals in Q2, which is similar to quarterly activity for the last couple years. So, what do these trends indicate for the broader M&A market?  It means that while PE still has considerable dry powder, this remains a seller's market.  Quality companies with earnings growth are hard to find, and when they decide to sell they are able to demand a high multiple.  So far, buyers have been patient, but eventually someone will have to flinch.  Either sellers will need to lower price expectations, or buyers will need to increase their price expectations for high quality targets.  If this doesn't happen, expect continued sluggishness. Click here to read the industry reports.

First Half of 2013: PE Deal Flow Continues to Struggle

July 11, 2013 11:59 by Clayton Reeves in Capital Markets, M&A, Private Equity  //  Tags: , , ,   //   Comments (0)
For dealmakers, 2013 was primed to be an active time with optimism returning to markets and dry powder being expended in the form of M&A transactions.  In terms of the private equity, this did not come to fruition during the first half of the year. According to Pitckbook, deal flow continued to be stagnant through June of this year. You can see below the drop in number of deals from 1,148 in second half 2012 to 738 in first half 2013.     The monthly figures are similarly stagnant.      Despite an apparent uptick in capital invested in June, the underlying numbers tell a different story.  The $23 billion acquisition of Heinz has almost singlehandedly increased the capital invested over the prior four month average. There are several reasons we might be seeing this softness.  First, many of the deals that would've been littered across the first half of 2013 were rushed to completion in the last half of 2012, for tax purposes.  Furthermore, the optimism that we expected to guide M&A recovery has also spurred increases in equity prices, thus keeping multiples high.  In an already challenging environment for buyers, this has made closing a deal even more difficult.  There is hope, however.  Some professionals are seeing increased activity during the first half of 2013, although they said that the fruits of these labors would not be seen until later in 2013. Read the rest of the Pitchbook report here.

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