Why are the PE firms Winning? In a word, Patience.

Nov 24, 2015

Why are the PE firms Winning? In a word, Patience.

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Last week we discussed the fact that how more and more often we see PE firms winning auctions – buying companies that once we would have expected to see go to strategic buyers. You can see the post here.

Now let’s talk about one of the big reasons WHY. Sure PE firms have raised tons of money that they can spend on buying businesses. Sure ample financing is available for these transactions, at low interest rates. Sure PE firms are really in the full time M&A business and may be willing to take more risk.

One reason that few talk about, however, is PATIENCE. PE firms have patience. Their investment horizon is 3-10 years. That’s when they want the value of the firm to be strong. Along the way, they are fine if they need to spend some money in the short term in order to make more money later. Publicly traded companies, slaves to the earnings cycle, often have an investment horizon measured in months – at least in the sense of making the deal be accretive to earnings. I can’t tell you how many times we have heard the decision makers at a publicly traded company insist that their financial forecast model must show EPS accretion in the very near term or they won’t buy. We have had them refuse to accept forecast dilution out 12 months of 0.001 cents. While their models do include the benefits of synergy, sometimes it takes more than a few months for the full benefits to emerge. The problem is that sometimes it’s not unusual if the synergy benefit doesn’t get them to accretive earnings for a couple of years. So they bail out.

Wired, the tech publisher has pointed out that Hillary Clinton of all people called this “short-term ism” and referred to it as “the tyranny of today’s earnings report.” Prominent venture capitalist Marc Andreessen also points out that pressure from activist investors is forcing public company CEOs to “give back huge amounts of cash instead of investing in their business.”

M&A transactions provide opportunity for strategic buyers to acquire important capabilities sooner and with less execution risk than trying to build them organically; and not all strategics are slaves to “short-termism.” Microsoft has done just that three times this year – buying Israeli startups Aorato, Adallom, and Secure Islands; Google has bought its fair share of potentially disruptive young companies like Waze without sweating short term dilution; as has Amazon, another strategic that understands the value of patience and its reward – a share price that has doubled in value this year .

In middle market M&A, where we advise both sellers and buyers, we see public companies much too worried about how the purchase price may possibly affect their near-term trading multiples rather than how the target company will help accelerate their growth over the long term. Savvy PE firms don’t think this way and increasingly they are coming out on top.

Recent transactions involving Interactive Data Corporation (“IDC”) and SunGard provide good examples of PE patience in the FinTech space (we spend a lot of time thinking about this space). Two PE firms, Silver Lake and Warburg Pincus, bought IDC for around $3.2 billion at an auction five years ago. Five years later, they sold it to a strategic, Intercontinental Exchange (“ICE”) for $5.2B earning roughly 2.5 times their equity investment.

Bain Capital, Blackstone and Silver Lake (three other PE firms) bought SunGard at an auction almost ten years ago – again beating out strategics. Recently, they agreed to sell SunGard to a strategic – doubling their money.

An article in yesterday’s WSJ shows that PE investments have outperformed public equity markets by 5% over the last 10 years.

Perhaps the fund managers investing in public companies should pay attention.


— Jason Panzer

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