“Competition is heating up in the world of private equity,” says William Alden in his Dealbook article. According to him, private equity executives are noticing an increase in competition for deals in the last year or so. Several say that, in the face of competing bids, they have been forced to sit on the sidelines more often than they would like.
Is this competition primarily due to low interest rates and generous bank financing, as the article suggests? To a certain extent, that is true. However, there are other important factors at play, that may be worth exploring, as well.
To quote the article further:
“We’ve been a little less active than we would have liked to have been in the last 18 months,” Joseph Baratta, the global head of private equity at the Blackstone Group, said at a venture capital and private equity conference. “We’re not finding that edge. We’re being a little more disciplined on that value metric.”
Like Mr. Baratta, Candice Szu, a senior vice president at the Carlyle Group, emphasized the importance of finding an “edge” in competitive situations. That often means bringing a particular expertise in an effort to make an offer more compelling, she said. “It’s something we always ask ourselves: What can we bring to the table that’s a little different?”
Why do Blackstone and Carlyle need an “edge,” one may ask? Firms like these traditionally had unmatched resources and reach which, in the past, helped them uncover deals that others couldn’t. However, that has changed. Today, smaller private equity funds are also able to get to the same opportunities, thanks to social media and specialized deal marketplaces (such as Navatar Deal Connect). Smaller funds are getting savvy at securing a large inflow of deals and becoming efficient at processing them rapidly, thanks to the latest cloud-based tools and databases, that can easily match or exceed the infrastructure of larger firms. Armed with the new tools, they are able to level the playing field with a more “personalized” approach, causing larger players to have to find an “edge” to compete.
A good example of how smaller firms are competing, is outlined by Martin Stein (Managing Director at Blackford Capital), in this webinar. Blackford, a middle market private equity firm focused on manufacturing & distribution, has mastered the science behind widening their reach to get in front of the right deals.
In addition, there are margin pressures, as the article points out. Private equity managers must find cheap investments at a time when stocks are near historic highs.
Though private equity firms will continue to hunt for bargains, returns may not be as high in the future as they have been in the past, David M. Rubenstein, a co-founder and co-chief executive of Carlyle, said in a keynote speech on Sunday.
“The days of getting fabulously rich in private equity may be a little bit behind us,” Mr. Rubenstein said.
Are the low returns a temporary phenomenon, due to interest rates and other factors? Or are they here to stay? I’m no private equity guru, so I will leave that to the experts.
But I do believe that competition can’t be all that bad. It may lead to better times ahead, for the industry.