A recent survey of 142 professionals conducted by ACG New York, the largest association of middle market deal making professionals in New York, found that 83% of them expect private equity investments to outperform the S&P 500 in 2016.
“Middle market private equity firms are increasingly focused on value creation strategies to improve business performance in their investments, as opposed to the more traditional leveraged buyout approach. In spite of a frothy M&A market and significant dry powder, this transition is allowing private equity firms to build more meaningful businesses sought after by both strategic and financial buyers. The shift from financial engineering to value creation is enabling private equity to continue to deliver superior returns to the S&P 500,” said David Hellier, ACG New York Board Member and Partner at Bertram Capital.
The survey results also indicate strong deal flow, as 66% of respondents believe their firm’s overall transaction volume will increase. There are a number of reasons for this. “Based on the deal sourcing performance Bertram Capital saw in the second half of 2015 and direct feedback from a broad spectrum of investment banks on strong pitch activity, we expect to see not only strong deal flow, but more actionable deal flow moving into 2016. We are seeing more family and founder owned businesses coming to market, which is a good indicator of the strength of the M&A market,” Hellier continued. “We are also seeing how the recent strong fundraising environment and resulting need to put capital to work is driving transaction volume. The middle market has become highly efficient, driven by a host of investment banks nationwide to develop and market deal, ample capital from both private equity and lenders and sellers willing to test the water in this frothy environment, all of which will drive increased transaction activity in 2016.”
At the same time, 62 percent of those surveyed believe that family offices will have a greater impact on transaction activity in 2016. Family offices have been very effective middle-market investors and are keenly interested in private equity.
“In the current market environment, the supply of capital continues to exceed the supply of quality deals. Therefore, funds and families are now finding that they need to market themselves more aggressively and look at companies that may need operational, financial, marketing, and channel development,” said Martin Okner, Chairman of ACG New York and Managing Director of the Merchant Banking and Advisory firm SHM Corporate Navigators. “Families have three distinct advantages as direct investors/co-investment partners in these situations. First, they have the flexibility to provide equity, debt, or any combination of the two. Secondly, investments into operating companies can provide a family with favorable tax advantages as part of their wealth succession plan in addition to the potential for capital appreciation. This often translates into a family office holding the company for a longer period of time than other investment firms, thus providing management with more runway to implement their growth strategies. Third, family offices often have very little turnover and they favor investing in industries where they have direct operating experience, which delivers the portfolio company a high degree of continuity and access to a broad range of industry relationships to facilitate growth.”
This article was written by Russ Alan Prince from Forbes. This reprint is supplied by BNY Mellon under license from NewsCred, Inc.
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