After meeting with a variety of private company owners and private equity investors this summer, I've been surprised by the tentativeness in both camps. While I'm a firm believer that M&A activity is poised to pick up and is a leading indicator of a recovery, I have to ask, "What are they waiting for?"
We have all heard the same comments from small and medium sized business owners who say they've weathered the storm and feel the worst is behind them. They reflect on the anxiety they experienced during the crash, and the vast majority of those still standing feel they were fortunate to have saved the business. While clearly relieved, they also express cautious optimism for the future with a lack of conviction of how quickly things will noticeably improve. I then ask if they've considered selling the business, and almost to a man I hear, "the private equity guys have disappeared, but that's OK because I sure wouldn't want to sell anything right now if I didn't have to".
As for private equity firms, they've been busy fixing the companies in their portfolio they can save and calming investors. They've also taken a look at potential deals, but they're extremely skeptical of the future potential of any company that is on the block right now. As the private company owner says, "Why would anyone want to sell anything right now unless they have to?" There we have it. It really isn't about a lack of capital or leverage, it's really about a lack of confidence and unrealistic expectations. Sellers still haven't adjusted their expectations on valuations to address the risk private investors still see in the market.
For the buyers, they continue to wait for that magical day when valuations appear more reasonable. For sellers, they're keeping their fingers crossed that their businesses continue to improve and that private equity buyers will come back. While it seems like a standoff, I believe the buyers will come rushing in when they feel they may miss the window. Buying good companies at a bit of premium is going to look a whole lot easier than buying marginal companies at a discount and trying to turn them around. You get what you pay for.
So, where are the private equity guys? What are they waiting for?
Let me know your thoughts.
