Private equity firms owned more than 6,100 portfolio companies when 2011 reached its halfway point, according to a report by Pitchbook and Grant Thornton. One-third of those 6,100 companies have been held for more than five years. The result of this oversupply of tenured portfolio companies is a large exit strategy from private equity groups. With strategic buyers’ enormous cash holdings, low earnings on interest and acquisitive behavior in 2011, private equity groups are seeing an opportunity to sell. PE firms also need to appease limited partners by deploying capital and increasing returns, which will ensue through an exit strategy.
Private equity firms still have ample capability to perform acquisitions with an overhang of capital close to $400 million. However, the current market appears more situated for private equity groups to exit rather than acquire. So far in 2011, private equity acquisitions made up just more than 10 percent of total deal value, as compared to 2006 and 2007 where private equity acquisitions accounted for approximately one-third of total deal value. It has been difficult for private equity groups to compete for companies as strategic buyers continue to offer aggressive cash bids and continue to maintain lower borrowing costs.
The overall merger and acquisition market has remained rather flat the last few months due to uncertainty in the global market. However, in Northeast Ohio, private equity groups have become very active in November with The Riverside Co. doing multiple acquisitions and exits, and Blue Point Capital Partners making multiple acquisitions. Expect to see a lot more activity from local private equity groups as exiting portfolio companies becomes more advantageous and capital overhang continues to linger.
Albert D. Melchiorre is the president of MelCap Partners LLC, a middle-market investment banking firm. He is also a director on the ACG Cleveland board. For more information on MelCap Partners, please visit www.melcap.co. For more information about the Association for Corporate Growth, please visit www.acg.org/cleveland.
Deal of the Month
The deal of the month is awarded to Blue Point Capital Partners for the company’s two acquisitions in November. On Nov. 1, Blue Point announced that its portfolio company, Quality Synthetic Rubber Inc. would acquire Wisconsin-based Quadra Inc., a manufacturer of custom-molded silicone products. Blue Point’s portfolio company QSR, locally based in Twinsburg, is a manufacturer of highly engineered, molded rubber components. QSR’s acquisition will expand the company’s medical business and diversify the current customer base.
On Nov. 16, Blue Point completed its second acquisition of Selmet Inc., based in Albany, Ore. Selmit is a manufacturer of complex titanium castings for the aerospace and defense industries. Blue Point acquired Selmet because of the company’s growth prospects as the aerospace industry moves more towards lighter weight products. Selmet produces many lightweight titanium products, including engine, airframe and other aircraft components.