The top 8 business schools produced half of the senior-level professionals in private equity. Even more impressive, 25% of private equity executives are alumni of the top 2 schools – Harvard and Wharton.

In studying our historical data of private equity portfolio company investments & exits, I found that the private equity community, as a group, tends to miss macro-economic trends, often buying at the peak and divesting at the bottom of market cycles. But select private equity firms got the timing quite right and some contrarian firms got it really right.

Below, I list the firms that nailed the timing of macro-economic events in their investment/exit strategies relative to the last major market cycle. See who made the list…

The best method to find the right financial buyer for your client’s company is to keyword search the business descriptions of the portfolio companies to find a private equity firm that has already made a similar or related investment. This is the single best indicator of potential interest in a particular deal.

You could filter by industry categories and size parameters, but this is more of a shotgun approach. Finding portfolio companies similar to your client is more of a rifle shot. The PE firms from this search will be your A-list.

Once you establish a list of PE firms with relevant portfolio companies, make sure you connect with the right person at that firm. If you contact the wrong person at the right firm, you can still sometimes get the wrong answer. My advice is to connect with the person with the title “Business Development” or the person who holds a Board seat for the portfolio company of interest to you. You can often find who holds a seat on the Board by looking through the professional bios, which we also track.

U.S. private equity firms, on average, acquire approximately 75% of their portfolio companies outside their home state (up from 64% in 2010).

Reviewing historical data from our Research Database, there appears to be a gradual trend of PE firms increasingly investing further from home. I would speculate this correlates to an increase in fund sizes, permitting the financial buyers to acquire larger portfolio companies, thus justifying a larger geographic reach.

As an industry average, private equity firms tend to hold approximately 25% of their portfolio companies outside their home country (and 75% domestic). This 25-75% mix of domestic vs. cross-border investing seems to hold fairly constant over time.

(Note: this study refers to the actual number of portfolio companies, not the enterprise values)

www.PrivateEquityInfo.com

I recently spoke to Ben Wallace of Azalea Capital. With some minor edits, the transcription below captures our conversation surrounding private equity and deal sourcing (italics text are Ben’s words).

Ben Wallace – Azalea Capital

Which deal channels are you closing?

Historically, most of the transactions we’ve closed are with companies we pursued directly or where an advisor has made a limited number of qualified introductions. The number of advisors covering the lower middle market has certainly increased over the last 10 years or so, but we continue to see value in having both a direct outreach to companies in select industries as well as maintaining an active relationship with the advisors covering our target market.

Is valuation a factor at play here?

We often hear about international financial institutions buying U.S. companies. Our data shows 5 – 7% of all U.S. portfolio company investments made by private equity firms are from international private equity firms.

In a previous post, I looked at capital raises from 88,000 Form D filings from 2014 – 2016.

For this post, I mapped the distribution of fund sizes in 2016 from Form D filings (ignoring funds less than $5 million).

Although the fund size distribution is somewhat flatter than expected, there’s a definite concentration in the $100 – $250 million range and a steep drop off for funds with $1 billion or more. This is consistent with the private equity fund sizes we see in our database at www.PrivateEquityInfo.com (we don’t use Form D data in our database).

The next chart shows how this has changed over time, comparing the same 2016 data to 2015 and 2014.

Private equity activity has increased dramatically since the launch of our Research Database in 2005, especially in the middle market – more firms, substantially more capital.

Besides our own internal database, year-to-year changes in Form D filings provide another indicator for private equity capital raising activity.

Using data from 88,000 Form D filings over the past three years, I compared the capital raising trends for private equity funds, hedge funds and venture capital funds.

Here’s what I found…

I previously discussed the trend in median holding periods for private equity-owned portfolio companies. However, there is a significant standard deviation in the data.

The histogram below shows the distribution of holding periods for portfolio company exits in 2016. The data revealed two interesting insights… one driven by macro-economics, the other cultural.