I recently read an article in the New York Times Dealbook section by Stephen Davidoff titled, “For Private Equity, Fewer Deals in Leaner Times.” The article has a lot of interesting information on the changing times in the private equity markets. The author lists the primary forces driving this turbulence.
Too few “good” merger and acquisition opportunities are being seen. “Deals” are greatly overpriced. There are fewer sellers in the market, and the ones that are making themselves available are being snatched up by strategic buyers (those from the industry, and not financial buyers), who can drive offer prices higher, leaving them with little or no margin. But what swung my head around the most was that the private equity industry's biggest problem is having too much money to invest.
You read that correctly — too much money to invest. To be clear, Davidoff does an excellent job of articulating the state of private equity and the hurdles that are changing that industry. Nevertheless, when I read the phrase “too much money to invest,” it got me thinking about the high-tech aftermarket services industry and how underserved it has been from a private equity standpoint.
Having worked for a private equity-owned high-tech aftermarket services business and now as an adviser to that space, I see plenty of really good platform companies (ones that can be built upon) with strong footholds in service or geographic niches that truly make them unique (read: “valuable”). What they lack are the funds and guidance that a responsible and possibly patient private equity firm can offer. The recent historic activity would make you think it is an active marketplace, but aside from a few high-profile transactions and the most recent Blue Raven deal with Leading Ridge Capital Partners, LLC, the activity is spotty at best.
Not only do these platform companies in the high-tech aftermarket services space make for attractive investments, but it seems to me that the financials in these “niche companies” are there to support private equity interest, as well. These businesses typically have gross margins in the 35-40 percent range and net margins that are really attractive when compared with the overall high-tech space.
Combining or rolling up companies with expertise in adjacent service and/or geographic areas into a “newco” with broader reach and a deeper service offering will surely deliver financial results that private equity would consider better than not investing. That said, I know I am taking some liberties in describing the process and its complexity, but I do so to make a point. The high-tech aftermarket services space is a fractionalized marketplace with accomplished participants, quality customers, and better than traditional financials when compared with the overall industry averages. To this, I say, “Hey, private equity guys, look over here.”