Insights
What is Private Equity and How Active is it in the Current Market?
August 20, 2021
While you may be hearing that the M&A market is currently active, numbers speak volumes. A recent article from U.S. News cited that private equity (PE) has inked more than 2,300 deals for the first five months of 2021. Year-over-year, this is just over a 21% increase in deal volume. In fact, according to Pitchbook data, in the first half of 2021, PE firms closed on 3,708 deals worth a combined $456.6 billion. That’s almost two-thirds of the $711.6 billion deal value recorded in the entire year of 2020, and the two years prior. It is estimated that there is roughly $3 trillion of dry powder—also known as available funds—on hand for investment, with even a large amount of assets under management.
Historically low-interest rates and record levels of fundraising have left private equity with dry power that they must put to use. The combination of these factors has created competitive bid scenarios for many sellers. It appears that many private equity firms believe that this trend will continue for the coming months. According to S&P Global Market Intelligence, roughly 7% of private equity firms believe that the investment landscape will deteriorate in the coming months.
You may be asking yourself, “What is private equity?” Private equity firms obtain capital to invest in private companies. They have a set period of time to make the investments with the goal of optimizing return for their investors. Their investors tend to be institutional investors such as insurance companies, pension funds, endowments, etc.
The firms typically invest in mature companies with predictable, steady cash flow and a need for operational changes or growth capital. Private equity firms will utilize their capital, connections, and expertise to help improve the managerial, financial, and operational aspects of the business. Their goal is to increase the profitability of the company as this will help drive the value of the company upon exit. The firms make investments with a ‘buy and build’ mentality.
Private equity firms realize their returns when they sell the investment. The firms tend to have a goal of roughly 20-30% return on their equity. Private equity firms will use leverage to help maximize their return. They also charge a management fee, typically a percentage of total assets under management, also known as AUM.
Author
Kendall Stafford
Managing Partner
Benchmark International
Share This Post
Categories
Get These Insights Delivered Directly To Your Email
Explore our curated collection today and stay ahead of the curve in M&A.
Related Posts
Managing Expectations While On MarketDeciding to sell your business can be a nerve-wracking yet exciting endeavor. It marks the culmination of many years of dedication, hard work, and strategic planning. As you prepare to go to market, engage with buyers through site visits, field and respond through information requests from interested parties, and hopefully navigate potential negotiations with buyers, it is vital not to overlook the significance of the market feedback you may receive while fielding these various levels of interest. The input received throughout the stages of this process is paramount to consider when managing your expectations while you are on the market. Understanding and finding the overall market consensus of feedback can help you determine what may add value to your overall offer or detract from your valuation. An often overlooked aspect is considering the market feedback generated by interest and adjusting your expectations accordingly.Beyond The Price Tag: Non-Financial Considerations In Business ValuationIt’s easy to be swept up in the flood of advice and methods for valuing a business. A quick internet search provides almost infinite resources right at your fingertips. From more general approaches to specific analyses, there is a lot of financial data to parse through, regardless of the methods you choose.