Turning the page on a great year is always bittersweet. While the future is exciting, the status quo is also mighty inviting. For private equity, 2016 will go down with Dickensian hyperbole as “The Best of Times”.
Our business model turns on six or seven main ingredients, the absence of any one of which can make a great cake unremarkable.
- Low Interest Rates
- Plentiful Liquidity
- Low Tax Rates
- Willing Sellers
- Efficient M&A Markets
- Favorable Taxation of Carried Interest
- Stable Macro Economic Environment
Our industry has matured to a point where our bench of service providers, industry experts, operational consultants, and pricing specialists is prolific. By comparison, in 1999 when we founded CapitalWorks, the Christmas party was eight people, six of whom were creditors! The market for buying and selling was choppy. The providers of senior and mezzanine debt changed their appetite for providing liquidity more often than my teenage granddaughter changes outfits. While lawyers and accountants were skilled at most aspects of the M&A process, there were few diligence providers for mainstream services like Quality of Earnings, Environmental Due Diligence, Market Surveys, Customer Satisfaction Surveys, Operational Improvement, Pricing Analysis, HR Consultation, and Benefits and Insurance Review.
The employment multiplier from the Private Equity Business Model has become simply HUGE. You can prove it by attending any annual chapter meeting of the Association for Corporate Growth. What used to be 150 guys (very few women) swapping lies over beers and, sometimes, something a little stronger, now is close to 900-1100 men and women still swapping lies and drinking more prosperous brands.
The largest change from 1999 is our industry now suffers from constant media and political injustice; I guess it is our fault. If you are not creating your own message in the marketplace, your competitors and detractors will do it for you. We should become less private about claiming GDP and employment credit. I regret that Mitt Romney had a perfect chance to educate and exonerate when he was running for President but he never delivered the counter punch. We are all the worse for his passivity.
The most interesting aspect of our industry’s poor image is we may simply be a business abstraction to most people in political life. If you ask most politicians what the private equity industry does, they will quickly confuse you with Venture Capital. My favorite insight about how politicians view us came years ago when I talked to one of our County Commissioners about engaging the private equity industry in a discussion of Cuyahoga County’s regional economic development plan for which he was responsible. He asked me with all seriousness “What is private equity?” I fear the political class has a similar abstract view of PE importance to GDP or our value added on important political subjects like jobs.
There is little recognition of how private equity has brought credit stability to the lower middle market of companies with less than $100 million in revenues. Formerly, many of these companies were owned by entrepreneurs who supplied personal guarantees to the banks, but were generally reluctant to invest fresh capital into the business, especially when it was in trouble. Today, most banks expect private equity owners to provide “support” when a company breaks covenants or uses bank funding to support cash losses. That support usually means additional equity in return for time to remedy the problem. There are a whole group of lower middle market lenders who want to bank PE owned firms for just this reason.
As we enter 2017 we remain bullish on our business model and our ability to make a meaningful contribution to the health and prosperity of businesses in the lower middle market, especially job preservation and creation. Now we have PE attribution for supporting a large and growing group of taxpayers and that is not an abstraction.
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