Fall 2016 issue of Horizons

Add-on investments have become increasingly popular, as opposed to new platform investing. Instead of chasing mega- deals with high valuation multiples, firms are opting for smaller, less risky and cheaper deals to add value to their portfolios. Many of these less risky deals feature middle market sellers, often priced at a lower multiple than their mega-deal relatives. According to Pitchbook, the median EV/EBITDA multiple for investments with an enterprise value (EV) under $25 million dropped to 5.3x, while the median EV/EBITDA multiple for investments with an EV between $25 million and $250 million dropped to 6.5x. However, our recent experience suggests that these multiples are on the low end of the range currently at play in the middle market. Additionally, many private equity firms are restructuring their strategies with themed investment approaches. Firms adopt a theme after considering their own expertise and prior successes, then choose to specialize in that selected realm going forward. By centering its focus, a firm is better able to detect the macro indicators for its particular investment thesis – before other, more diversified private equity shops. Such an approach can help expose investment opportunities sooner, as well as enable a firm to fully capitalize on industry and market nuances to help facilitate returns. Thematic investing and its inherent cost- effective synergies also render a private equity firm more attractive to the growing number of limited partners (LPs) looking for specific industry exposure. Our recent experience indicates that private equity firms with well thought-out investment themes have been far more successful in sourcing and closing deals than those firms which consider themselves “generalists.” Furthermore, as LPs search for less traditional and more lucrative ways to get involved with

Private equity firms are turning to technology to strengthen their portfolios

general partners (GPs), levels of co-investment have risen.

This shadow capital does not factor into a private equity fund’s fundraising total, but can give the providing LP a more prominent voice in fund decisions and help lower fees. Of the $619 billion raised by private equity firms in 2015, shadow capital accounted for $161 billion. Industry Spotlight: Tech The tech industry has firmly taken its place as one of the favorites of private equity in the first half of 2016. Disregarding tepid predictions for investments in tech, private equity firms dabbling in the industry have thrived since January 2016. Accounting for only 11.0% of all private equity buyouts just 4 years ago, technology represented a record-high 46.0% of buyouts in the first half of 2016. As fear of a possible recession or pull back looms, private equity firms are turning to technology to strengthen their portfolios. Particularly popular are stable sectors such as corporate software providers, which enjoy high recurring revenue models, strong macro tailwinds and cycle resistance. The list of technology companies currently owned by private equity firms includes notables such as Veritas, Qlik Technologies, Cvent and Dell among others.

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