Local private equity investment fell off a cliff last year. But managers are expecting improvement in the second half of this year after some encouraging signs in late 2009.
“In some segments of the private equity market, last year ended with more deals than the combined total of the previous three quarters,” said Chris Britt, a managing partner at Newport Beach-based Marwit Capital LLC. “Conditions are continuing to improve into 2010, which is encouraging.”
Market watchers expect pent-up demand from investors to drive a resurgence in private equity buys of small to midsize companies that survived the recession, working back up to deal levels of a few years ago.
But fund managers are being more selective in how they raise and spend money after the roller coaster of the past few years. Private equity deals soared to record levels during a six-year growth spurt, peaking in 2007 with 57 local companies bought by funds, according to Thomson Reuters Corp.
That growth was echoed across the country, when a record $794.4 billion exchanged hands in nearly 5,000 deals.
But a freeze in lending and a growing recession dropped private equity deals to a four-year low in 2008. And by the end of last year, the number of U.S. deals was cut almost in half from peak levels. Valuations on those transactions were back to numbers seen at the end of the technology bubble seven years earlier.
“We’ve probably hit a bottom, both nationally and in Orange County,” said Dan Lubeck, managing director at Solis Capital Partners LLC, a private equity firm in Newport Beach. “Good companies stand
out in markets like these. The ones that have been resilient through recessionary times are even more attractive targets now.”
Pent-up Demand
And that’s likely to continue to be the case as pent-up demand for those companies comes to the forefront, according to managers.
“We saw a substantial pickup in dealmaking activity in the fourth quarter,” said Britt. “There still appears to be some upside left.”
The biggest stumbling block to private equity borrowers will be a still tough credit market, according to Britt. He said companies with $100 million or less in revenue are particularly being crimped.
“It’s easier for bigger companies to get financing now than early last year,” Britt said. “For smaller companies, the credit environment remains difficult.”
Despite such hurdles, several local private equity managers say they’re wading back into the market. ClearLight Partners LLC in Newport Beach has about $175 million left to invest through its existing funds, according to managing partner Michael Kaye.
“There’s a bit of thawing,” Kaye said. “Credit markets for mid-level buyouts are opening a little.”
Solis Capital is starting a $100 million private equity fund with an eye on midsize companies that are deemed undervalued and considered strong long-term investments. Solis is going to run the fund much like a charitable giving commitment, where investors commit to give a certain amount of money to the company over a designated period of time to invest as it sees fit.
“It’s going to be a committed fund. That means investors essentially don’t give us their capital, but they contractually commit to giving us a certain amount over a specific period of time,” Lubeck said.
The difference is that investors are “making an investment in us rather than any specific companies,” he said.
Marwit Capital has launched a fund with $250 million targeting small to midsize companies in a variety of industries, according to Matthew Witte, a founding partner at the firm.
“The very large mega-buyout phase is over in private equity investing,” he said.
“Capital firms have shifted their focus from very large firms to mid-market and smaller deals.”
OC is dominated by smaller buyout opportunities, according to Witte.
“The type of companies that have grown up here are largely in private ownership,” he said. “And many of those owners have reached the stage where they’re looking to take some chips off the table.”
StoneCreek Capital Inc. in Irvine is winding down a $61 million fund. It also has a letter-of-intent with a company on a new deal that is expected to close later this year, according to Drew Adams, the firm’s president.
One Deal at Time
Unlike some of its counterparts that are amassing funds and then looking for projects, StoneCreek is pooling money for one specific deal at a time.
“We’re raising money one transaction at a time now instead of committing capital to a single, particular fund rooted in a specific investment strategy,” he said.
Most everyone in the industry seems to be expecting more deal-making activity in the next 12 months, according to Adams.
But that doesn’t mean there will be a spike in activity any time soon.
“Once someone decides to sell their company, it can take anywhere from two months to a year to put together a deal,” he said. “So it can be a fairly lengthy process.”
Some private equity investors are sitting on cash looking for the right investment. Los Angeles-based Riordan, Lewis & Haden closed a $265 million fund more than three years ago, but it’s still looking
for a few more good companies to fill out its portfolio, according to Murray Rudin, a partner in the company’s Irvine office.
Once its portfolio is complete, he expects managers at Riordan to start looking to raise more money.
That’s a common theme that Tim Mundy, the regional leader of Deloitte’s investment management unit in Costa Mesa, is finding these days among buyout managers.
“After 2008, there was a lot of cash collected by private equity firms that they just didn’t know where to deploy,” he said.
Local managers are expecting that by the second half of this year most of their committed money will be invested, according to Mundy.
Niches
Industries such as technology, life sciences, financial services and energy seem to be gaining interest from managers, he said.
“A lot of the private equity buying that was going on in 2008 was around niches,” Mundy said. “They were looking for diamonds in the rough. Now, they’re back to more traditional and diversified investment strategies.”
