Annual McGladrey Survey Finds Private Equity Groups Seeking High-Quality Companies: Buyers Optimistic But Cautious, While Many Sellers Remain on Sidelines Awaiting Better Bids

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Jun 29, 2011, 08:45 ET

NEW YORK, June 29, 2011 /PRNewswire/ -- As the economy slowly improves, private equity group leaders say they have money to spend and are actively seeking companies to acquire, according to a survey of private equity group leaders released today by RSM McGladrey, a leading accounting and consulting firm in the U.S.

"Just because you have cash in your pocket doesn't mean you should buy the car on the lot you are told is the best value," said Don Lipari, national executive director of private equity services for RSM McGladrey. "Savvy shoppers have done their research and sought good advice on both price and fit. They truly understand what they're purchasing and the true costs associated with the purchase."

While buyers abound, many high-quality companies are waiting for the economic tide to turn and holding out for better offers, according to the study, which polled 75 senior executives who lead private equity groups investing in the middle market. The survey, which was conducted in the spring of 2011, also found:

Trend Toward Expansion Into New Sectors: In contrast to last year, when private equity groups tended to add-on to existing holdings, 60 percent of respondents this year said their major focus for the coming 12 months will be on acquiring new businesses.
Increased Industry Focus: Although almost half (49 percent) of respondents traditionally considered investments in a variety of sectors, 33 percent said they intend to narrow their focus. Amid a more competitive bid environment, buyers appear to be considering industry specialization to differentiate themselves.
Rise of Third-Party Due Diligence: Before striking a deal, 22 percent of buyers reported bringing in outside advisors to conduct due diligence. Prior to 2008, buyers rarely leveraged third-party expertise before signing a letter of intent.
Avoidance of Costly Surprises: Nearly half of those surveyed had significant adjustments to the purchase price 25 percent or more of the time. Moreover, 85 percent required a purchase price adjustment in at least one transaction.
Underestimation of Information Technology and Financial Reporting Costs: Indicating that IT costs might be underestimated in the deal-making process, respondents reported management reporting limitations incurred the greatest surprise costs post-investment (47 percent), followed closely by unforeseen capital expenditures (44 percent).
Initial Public Offerings Popular, but can be Lengthy Exit Strategy: While use of IPOs as a sales tactic has grown, the majority of respondents agreed the time required to make a company IPO-ready is long. Indeed, 55 percent reported that they began preparing 18 to 24 months prior to the IPO. When it came to selling holdings, a third of survey respondents perform sell-side due diligence more frequently than five years ago.

The Boy Scout motto, "be prepared" was a theme echoed by many respondents. While they might currently have more capital than a year ago, private equity practitioners have grown more cautious.

"Prospective buyers are swarming quality sellers," said Hector Cuellar, president of McGladrey Capital Markets. "Private equity firms have their checkbooks out. They were previously anxious to find bargains – now they just want to deploy their assets as best they can since there is such a lack of quality deals."

The Private Equity survey was conducted on behalf of McGladrey by mergermarket. View the complete results of the 2011 Managing Portfolio Investments Survey.

About mergermarket

mergermarket is an independent Mergers and Acquisitions (M&A) intelligence service, with the largest network of dedicated M&A journalists on the ground in 65 locations across the Americas, Asia-Pacific, Europe, the Middle East and Africa. This team focuses on gathering actionable proprietary intelligence, creating the only origination database of live targets and bidders. mergermarket is also an unrivalled source of deal history. Public and private deals across a range of sectors can be searched using an exhaustive database. This proprietary intelligence and historical deals database is available to over 145,000 individual subscribers from more than 1,600 of the world's principal advisory firms, investment banks, law firms, private equity firms and corporates. mergermarket is part of The Mergermarket Group, which has over 600 employees worldwide and regional head offices in London, New York and Hong Kong.

About RSM McGladrey

McGladrey is the brand under which RSM McGladrey, Inc., and McGladrey & Pullen, LLP, serve clients' business needs. Together, they rank as the fifth largest U.S. provider of assurance, tax and consulting services, with 7,000 professionals and associates in more than 80 offices. The two firms operate as separate legal entities in an alternative practice structure. McGladrey & Pullen is a licensed CPA firm that provides assurance services. RSM McGladrey is a leading professional services firm providing tax and consulting services. Both firms are members of RSM International, the sixth largest global network of independent accounting, tax and consulting firms. For more information, visit the McGladrey website at www.mcgladrey.com, join our Facebook fan page at McGladrey News and/or follow us on Twitter @McGladrey.

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