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The private equity industry is changing

Dollar sign in coins

Private equity firms have been strong players in the middle-market M&A space over the last couple of years.

They have aggressively bid on companies, therefore increasing selling prices. Whereas the newspapers carry reports of the larger cap deals, private equity firms had an impact in the middle market and the lower middle market as well.

Private equity firms  are on their way back.

We are now witnessing a shift where private equity players are returning to the market. Most are using leverage, some deals even leveraged to the degree they were back in 2007. This will no doubt begin to push up business values.

The big difference is that there is a tremendous shakeout going on in the Private Equity Industry. The Deal Magazine recently wrote that as many as 20 to 30% of Private Equity firms are at risk.

Almost all other data suggests that most of the deals for the foreseeable future will go to the largest private equity firms.

The reshuffling should be good news for the marketplace. An efficient marketplace is better for both sides.

The process of selling a business will be significantly more efficient, and probably a better deal in the long run for the seller. "Real" Buyers will not be scared off as they have been in the past when a company was targeted by a PE firm.

In addition, the private equity firms that remain will be the PE groups that add value to the companies in their portfolio. They will have a much more vested interest in adding value to the firm, and seeing it grow.

They will focus on areas within the firm they can improve, such as marketing, purchasing, etc. Their exit strategy will not be a quick flip, but more building long term value.

You will still see a number of exciting headlines from the largest private equity groups, but most of the transactions will be limited to those large players. Many smaller PE firms will cease to exist. The weeding out of the more speculative Private Equity Groups focused on the middle-market will bring greater efficiencies to the market of buying and selling companies.

This will help both sides of the marketplace by providing a smoother process, greater chance of closing, and more value being placed on the best companies.

Ken Ducey is the brains behind Princeton Capital Strategies, providing value beyond a typical business broker.

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