merit investment bank grey opt2

Private equity is eating the world: Why your next business partner is likely Private Equity.

by | December 1, 2022 | Education, M&A, Private Equity Recapitalizations

Reading Time: 4 minutes

To borrow Marc Andreessen’s famous “Software is eating the world,” Private equity is not only eating software companies by the dozens, but it is also buying hundreds of middle market companies across all sectors, all around the globe.

Let’s examine why private equity may be your next business partner or provide you with a path to liquidity and the famed “second bite of the apple.”

The stats:

From 2000-2021 PE returns have outpaced the stock market – Period. PE has an 11% return, whereas the S&P has returned 6.9%. So, for those institutional investors flooding PE with capital, it’s for good reasons…scoreboard!


Record fundraising and dry powder (un-deployed committed capital). Not only has PE raised record fund amounts, estimated to have tripled in the last decade, which have been getting larger in terms of total dollars per fund, but they have been raising funds with increased velocity. It used to take private equity up to 5 years to raise a fund; now, the average is about half that. With that velocity on the other side of the cycle, deploying that capital, PE must keep pace by spending what they have fundraised. They must buy companies to keep investors happy and put that capital to work.

More PE funds in aggregate– There are now over 18,000 private equity funds registered in the US. (Source: Bain). The proliferation of PE looking to arbitrage investor capital into healthy returns by buying middle-market assets shows no sign of slowing down.

M&A and investment return track record: with over 20% of all M&A transactions being led by PE, this share rose steadily with a pooled IRR of 27% in 2021; PE was once again the highest-performing private markets asset class. PE also continues to outperform relative to most public market equivalent (PME) measures. (McKinsey)

Diversity of capital. Traditionally, 80% of dry powder in the industry was earmarked for buyouts. Private equity is participating in secondary buyouts, different asset classes, and minority and growth equity plays. Therefore, PE is interacting with a greater section of private market deals, looking to become a one-stop shop for middle-market companies. Indeed, they are eating all levels of the capital stack!

So, while numbers have cooled some from 2021 historical highs, PE keeps eating more and more middle-market companies.

So why Partner with PE? The traditional playbook is well known and PE typically provides entrepreneurs (perhaps at the top of their bootstrapped game) the following:

Access to Capital – Use their investors’ money vs. your own to accelerate growth and eliminate your Personal guarantees! I’ve got candy!

Know how – They have engineered deals and seen more than most entrepreneurs can imagine. History repeats itself often, and they can save you the “dumb tax” of investing – that’s why institutions give them their money. They have become more efficient in selecting and de-risking deals.

Dispassionate investors seeking value – Value matters vs. lifestyle, toys, or egos (although we have also seen some PE guys with tremendous egos!). Most private business owners only return the cost of capital of their businesses. PE investors are forced to deliver a higher return, so their discipline and hand on the rudder can save many a shiny object chasing entrepreneur from ongoing perils or choosing pet projects to pursue or “well the client kept giving us business, that’s why we ended up with 50% customer concentration” type disasters.

Disciplined Cap-ex spending for ROI – Investments demand returns, not just a nice life(style) through the lens of ROI; cap-ex dollars are reviewed, pressure tested, and then spent if they meet the hurdle. Few middle-market entrepreneurs practice this level of rigor. Again, a sober and ROI-focused partner is a good one to have.

image 2

Rolodex – if PE pays you “market” for your company, they can only win (get a return) if they grow revenues and earnings. They often have sizable Rolodexes and other portfolio companies they can connect you with to grow internally “among the family.” 

Second Bite – The largest potential benefit of this relationship is that they are often value engineers and can help ensure you receive the famed second bite of the apple, which often can be larger than your first bite. For example, we have many clients where “the second bite” at 20% of their rolled equity was larger than their e 80% liquidity first bite due to rapid growth and value engineering—third & fourth bites of the apple. I have sold several firms where they have received a third and fourth bite of the apple as PE value enhancement often happens quicker in today’s market with PE trading companies 2-3 times in what would have been a typical 5-7 year hold period. Each time these lions eat, you also eat!

Cautionary Tale: We should mention the downside now that we have established PE prowess in securing middle-market assets and providing investor returns. Private equity is a professional financial buyer. They possess the knowledge and, more importantly, the discipline in their investment procurement and negotiations. These professional buyers roam like lions looking for their next meal. Remember, they must invest to achieve returns, it doesn’t mean they have to voluntarily overpay for your company.

That said, as long as money flocks to PE and their returns outpace the market, capital will follow them. Just be sure you have a lion tamer in your corner and you may just end up with Private equity as your next best partner.

Exit well!

253-370-8893 | | @MandAexit

Craig Dickens, CEO Merit Investment Bank

Craig is responsible for setting the firm’s vision, creating a culture of boutique personalized service, and recruiting experienced investment bankers to build the Merit Investment Bank team nationally and internationally. Mr. Dickens has advised many leading companies and participates on several middle-market company boards.

Having participated in every kind of business dynamic from start-up to IPO, merger to dozens of acquisitions in his own entrepreneurial career, Mr. Dickens serves clients by guiding them to strategic growth, business optimization, and profitable exit. Merit Investment Bank is a leading boutique investment bank focused on entrepreneurial middle-market companies. Merit Investment Bank executes sell-side M&A, buy-side M&A, capital advisory services, debt and equity capital raises, corporate finance, and valuation services.

Latest posts

The Truth About Private Equity and Your Business

If you’ve always dismissed private equity as an option, now might be the best time to reconsider. Too often, business owners assume private equity is going to come in and gut their business, just to drive up EBITDA with some financial engineering. While this may have...

read more