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Forecast: Private Equity Buyers Dominate M&A

Private equity buyers of businesses in the so-called “knowledge intensive arena” are expected to make 75 percent more acquisitions over the next two to three years than strategic acquirers, a new survey said.

The time is right, according to a new survey of 100 private equity and strategic buyers formulated by M&A advisor Equiteq, for buyers to find high-growth investments in IT services and other knowledge-centric segments. It also doesn’t hurt that private equity fundraising and capital available for acquisitions is at record levels.

The trend extends into the MSP market, where key buyers such as Evergreen Services Group continue to make acquisitions. Evergreen Services Group Head of M&A Ramsey Sahyoun explains the trend in this video:

Buyers appear to be undaunted by the potential of an economic or market downturn, Equiteq found. In fact, acquisition levels have stayed consistently strong as sellers take advantage of the favorable market conditions. While buyers are keeping tabs on the risks of an economic or industry slowdown and the impact of interest rate rises on leveraged acquisitions, their fervor doesn’t appear to be slowed by potential constraints at this point.

Private Equity: Big Investment Areas

Equiteq’s report, entitled The Knowledge Economy Global Buyers Report, is the fifth such edition and, similar to the others, asks buyers for their perspectives on the demand for digital technologies within their organizations. As expected, artificial intelligence (AI), data analytics and the Internet of Things, particularly the convergence of AI and data analytics, dominate their responses.

“The knowledge economy is going through a period of unprecedented disruption. The current wave of transformation is being driven by advances in artificial intelligence,” wrote David Jorgenson, Equiteq chief executive, in a forward to the study.

Here are some of the survey’s findings:

  • $40 million is the median optimum turnover size of a target.
  • Acquisition propensity for larger deals remains strong, but over half of strategic buyers are seeing more acquisition opportunities coming to market than last year.
  • Buyers of businesses operating within the knowledge economy expected to complete a median of five acquisitions over the next 2 to 3 years.
  • Buyer demand is being catalyzed by a robust industry and global economic outlook, as well as talent shortages in hot spaces of the market.
  • The last two years have seen a rise of 18% in the optimum turnover size of a target business.
  • Cash-rich acquirers are seeking deal opportunities that significantly move the needle for their organization.
  • Interest in North American opportunities is particularly strong. Despite the uncertainties surrounding Brexit negotiations, demand for U.K. opportunities is very high. There is also robust activity in growing markets across Continental Europe and the Asia Pacific.
  • Hot markets include healthcare, life sciences, energy and retail.

Private Equity Acquisitions: KPIs for Buyout Candidates

The study also detailed key performance indicators buyers look for in a potential buyout candidate:

  • 9% revenue growth.
  • 12% EBITDA (earnings before interest, tax, depreciation and amortization).
  • $200,000 revenue per employee.
  • 58% utilization rate.
  • 82% annual employee base retention rate.
  • 78% proportion of employee base considered permanent.

Strategic buyers’ top three drivers for undertaking M&A activity:

  • Broadening service offerings.
  • Developing industry specialisms.
  • Expanding digital capabilities.

“In the constrained talent market, M&A is being used as a tool to quickly build in-demand capabilities,” Equiteq said.

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