Gradual Improvement in Deal Flow Activity

As a business strategy due diligence consulting firm partnering with many of the leading middle market private equity firms, Acclaro Growth Partners has a front row seat on the state of private equity acquisition activity in the middle market.

In spite of a general slowdown in deal activity that began in the latter half of 2007 the middle market we support outperformed the overall market through the first three quarters of 2008. However, deal flow in all segments came to a screeching halt when the credit markets froze in September of 2008. New deals involving platform companies continued to languish through the first half of 2009 but an increase in portfolio company strategy development and “bolt on” company acquisition helped to offset the lack of platform acquisitions.

However, the good news is that the level of activity is slowly improving. A number of factors are contributing to the improving environment.

1.    An improving economy

2.    An improving stock market

3.    Improving credit markets and availability of debt financing

4.    Improved portfolio company performance

5.    Ability to place valuations on corporate assets

At the same time the structure of the deal continues to evolve in ways that differ significantly from the pre-2008 structure. Today the deal is likely to:

1.    Consist of a higher equity percentage, 50/60% versus 20/30%

2.    Debt financing remains difficult and expensive - but increasingly available

3.    Earn outs, seller financing and rollover equity are frequently components of the deal

While the environment is improving and is expected to continue to gradually improve, the days of acquisitions that are highly leveraged, cheaply financed with a high likelihood of assured returns is currently a thing of the past. With so many added risk factors and a reduced margin of error it is understandable that private equity groups are turning more frequently to third party business due diligence firms to assist them with their business due diligence and evaluation of the business thesis of the target firm.   

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