Easiest to Underwrite
Andrew Akers has looked at what the biggest buyout funds actually did with their companies, and the answer is not much. "they're not growing margins on average. So they've relied on revenue growth. They relied on multiple expansion and they've relied on leverage."
The PitchBook researcher's point is that the decade made that easy. "Like could you imagine a better period for this type of strategy?" Cheap debt, rising multiples, abundant financing. His read on why allocators still buy the largest names is blunt. "You're not buying these marquee managers because you think they're going to outperform. You're buying them because they're very unlikely to significantly underperform". His call for funds raised this decade: capital-weighted, the middle market beats the mega managers. A forecast on data that stops at 2021 vintages.
Sellers already feel the tailwind gone. Saurabh Singh of AlixPartners: "Everyone is coming to the realism that like, again, the multiple expansion that happened 4 or 5 years ago is not happening any longer." Alexis Underwood of Wynnchurch says buyers now pay for proof, not promise. "I feel like the companies that are performing best in processes today aren't kind of the flashiest, sexy as businesses. They're kind of the businesses that are easiest to underwrite."
Buyers expect to pay more for those, not less. BDO's survey of 400 US fund managers, released last week, has 82% expecting deal prices to rise over the next year. It also has 80% holding portfolio companies five years or longer, and 94% saying AI is reshaping their investment thesis.
Longer holds point toward owners who never planned an exit. David Williams built Advantage Services Group into a multi-state HVAC operator and competes for deals against "80 plus PE backed HVAC plumbing electrical consolidators". He draws the line himself. "we're not private equity owned." From the broker's side, Patrick Lange sells 20 to 25 trades businesses a year. "Eight of those are big consolidators and private equity buyers. But the rest of the buyers are mom and pops, buying other mom and pops."
André Perold, who runs HighVista Strategies, locates the stress in the same place Akers does. "It's toughest at the large end, where the entry multiples are the highest. The carry problem is the highest. We have found the DPI is much less of an issue in the lower middle market."
Two weeks ago the question was who pays for 2021. This week it is who was earning the return in the first place.
Sources: Interviews from Private Equity Funcast (Sep 23, Andrew Akers of PitchBook), Private Equity Spotlight (Sep 22, Saurabh Singh of AlixPartners and Alexis Underwood of Wynnchurch), Think Like an Owner (Sep 22, David Williams of Advantage Services Group; and Sep 24, Patrick Lange of Business Modification Group), and Capital Allocators (Sep 21, André Perold of HighVista Strategies).
Private equity investors say multiple expansion is over, mega funds relied on leverage rather than margin growth, and holds are stretching past five years.