The 2020 Mid-Year Economic Update_long

Private Equity-to-Private Equity Deals on the Rise

Undeployed capital, attractive financing and lessened desire to go public contributing to the pickup in activity.
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FCX Performance, Inc. changed hands last week from investors at Sterling Investment Partners to Harvest Partners, LP, moving from one private equity firm to another (Sterling Investment Partners and management will retain an ownership position in FCX). The management team at FCX, which has been in place since 1999, will remain the same.

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FCX’s long-held strategy of geographic, product and service expansion is expected to continue. Investment banker Jason Kliewer, a director at Robert W. Baird & Co. and an advisor to FCX on this transaction, says Sterling Investment Partners helped to facilitate FCX’s acquisition strategy in recent years, providing both capital and resources in support of management. Founder Charles Simon said in a press release that with the support of Harvest, FCX will continue to expand its footprint and its portfolio of products and services.

Private equity-to-private equity (PE-to-PE) transactions like this one are on the rise again following a lull during the recession. Kliewer says undeployed equity capital available at private equity firms and attractive debt financing markets have contributed to this trend. Private equity investors, more cautious during the downturn, have been sitting on funds they are now ready to deploy. Kliewer estimates there is almost a trillion dollars of buying power in private equity funds today when debt financing is included. (Read more about private equity’s role in the consolidation of distribution markets in Private Equity Drives Deal Demand.)

Another factor making PE-to-PE acquisitions ideal for industrial distributors seeking growth funding is that going public is a less attractive option for some. “Back in the 90s and early 2000s, you didn’t have to be that large. Today, the industrial distributors going public tend to be much larger relative to the last IPO cycle, and therefore the exit of an IPO is often less attractive given other alternatives, such as private equity,” Kliewer says.

As a result, private equity is helping to consolidate industrial distribution segments. “The big are getting bigger and even the mid-sized distributors are getting bigger, and they’re often doing that with the support of smaller private equity funds,” Kliewer says. “They’re taking the business up to a certain level, and at that level, the business typically needs additional investment and resources, and the business will trade up to a mid-market sponsor. As the business continues to grow it can trade up to yet another private equity firm focused on larger assets.”

While strategic transactions can mean big changes for companies, PE to PE transactions of platform companies like FCX tend not to trigger significant operational changes, as the new investors tend to support management’s vision and growth strategy, Kliewer says. “In many cases it doesn’t impact day to day operations at the company. It’s a change of ownership, but the company is continuing to grow and pursue its existing strategy.

Kliewer joined with FCX Performance’s CFO Charley Hale and CHS Capital’s David Hawkins to discuss merger and acquisition trends so far this year in MDM’s 2012 Wholesale Distribution M&A Update, available on DVD.

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