Management teams looking to partner with investment firms to grow their companies are in a unique position in 2014. With the increase in “dry powder” (the committed capital that private equity firms can deploy to buy companies), management teams have more choices in deciding which investment firms to partner with – if they meet the right criteria.
Dry Powder Rises
In 2014, asset sales of private equity-owned companies have been boosted by robust public equity and debt markets. This has enabled firms to return significant capital to their investors, who, in turn, are continuing to allocate more money into private equity funds. However, high asset prices have also decreased the number of buyouts as private equity firms have struggled to find good deals on profitable companies, increasing dry powder even more.
According to the Bain and Company Global Private Equity Report 2014, dry powder rose globally to over a trillion dollars in 2013. Buyout dry-powder rose to $400 billion in the same time period, making the total increase 12% over the prior year – one of the highest increases in recent years.
With so much of it in the marketplace, capital is a commodity right now.
What does an increase in dry powder mean for management teams?
Capital is no longer a differentiator. Management teams looking to partner with investment firms can look beyond capital and consider other characteristics.
Companies can be patient in finding strong partners to help grow their companies. This Reuters article calls the current private-equity industry position a “cash mountain” and points out that the situation does not appear to be changing in the near future.
Management teams now have more options than in prior years, and they have the luxury of finding the right partners – not just any partners – to help them take their companies to the next level.
How do management teams discern the right investment firms from all the choices?
With more choices when it comes to private equity, management teams should identify the distinguishing characteristics of investment firms and find the right fit for them.
There are many ways firms can separate themselves from the herd:
- Industry sector focus
- Experience from prior deals
- The culture of the firm
- The way the firm interacts with management teams
- Post-deal value-add that can help companies grow
With private equity firms sitting on a “cash mountain,” management teams have more options when finding the right firms to partner with. When those management teams choose an investment group that provides the needed support and resources, partnerships evolve into growth opportunities.