Trends in Middle Market Private Equity White Paper

1. Top trends in middle-market
private equity

2. About the author
Contents
Harris Smith
1 Executive summary
Managing Partner, Private Equity and Strategic Relationships
3 The impact of the credit crunch
Harris Smith is a Certified Public Accountant and the managing
partner of Private Equity and Strategic Relationships for
7 The explosion of cross-border M&A activity
Grant Thornton LLP. In 1976 Smith started his career in the
Baltimore office of Grant Thornton. In 1986, he was promoted to
11 The proliferation of operational partners
partner and in 1989 he relocated to the Southern California office
to head up the Assurance practice. In 1998, Smith was promoted
13 The emergence of sovereign wealth funds
to office managing partner of the Greater Bay Area offices, and in
2003 he became the West Region managing partner. In 2008 he
16 The middle-market compensation squeeze
became the managing partner of Private Equity and Strategic
Relationships.
18 Three hot sectors for investment
In his current role, Smith is responsible for the development and
21 The natural evolution of the private equity firm
enhancement of strategic relationships for the firm and at the
same time, overseeing the services provided to private equity
23 Conclusion
clients. This dual role provides Smith the opportunity to further
elevate the firm’s reputation and to create relationships with key
influencers to deal with challenges in the marketplace and to
enhance our brand. With over 30 years of experience, Smith is a
member of the firm’s National Leadership Team and the sponsor of
Grant Thornton’s Women’s Initiative.
Smith is a director, executive committee member and chairman of
the Association of Corporate Growth. He served as president
(2003) and director of the San Francisco Chapter of the
Association of Corporate Growth beginning in 2000. Smith resides
in Los Angeles with Jill, his wife of 26 years, and is the father of
twins, Stephanie and Jordan, who are seniors at the University of
Southern California and UC Berkeley, respectively.
Acknowledgements
The author would like to thank Danielle Fugazy, Lora DeSanto,
Pat Fanelli and Bill Haynes for their contributions to this project.

3. Executive summary
This white paper explores seven trends The middle market has been able to hold its own quite well
that have recently altered the way the
compared to the big-deal market.
private equity community conducts
business. Some of the issues explored in
the white paper are important because of
The key areas explored are: The first trend is that a cyclical
the cyclicality of the private equity
• the impact of the credit crunch, market brings change and change
business, while others are emerging
• the explosion of cross-border M&A breeds uncertainty. The subprime
trends that may become mainstream in
activity, mortgage/housing debacle and its impact
the coming years. As these private equity
• the proliferation of operational on credit is the primary trend that has
trends have gained visibility and affected
partners, triggered the 2008 down cycle. Private
investment opportunity in the middle-
• the emergence of sovereign wealth equity firms are returning to the days
market private equity sector,
funds, where they spend substantially more time
Grant Thornton decided to seek a broad
• the middle-market compensation looking for quality companies to invest in,
perspective on their current and emerging
squeeze, and they are performing more thorough
impact, how they developed, what is
• three hot sectors for investment, and due diligence rather than jumping in to an
driving them, how widespread they have
• the natural evolution of the private investment headfirst.
become, how they affect market
equity firm. However, contrary to the headlines
participants and what challenges they
that grace industry trade publications, all
create for the middle market.
is not doom and gloom. The middle
The current environment
To explore these questions, a
The private equity market will finish out a market has been able to hold its own quite
Grant Thornton team considered many
year that will be remembered as the one well compared to the big-deal market.
data points, including reviewing
when the record dealmaking streak ended. That being said, there’s no denying that
Association for Corporate Growth
A new era of quiet uncertainty has come there has been a flight to quality, a
(ACG) and Thomson Reuters surveys,
over the industry. Gone are the days of contraction in leverage multiples and a
interviewing private equity professionals
frenzied dealmaking. 2007 produced the tightening of financing terms. The good
about the state of the market, and drawing
third and last year of consecutive record- news is that deals are still getting done.
upon the expertise and experiences of our
breaking deal volume. According to The second trend is that private equity
private equity service professionals.
Thomson Reuters, U.S. buyout firms firms have adapted to the changing
Through many different sources and
completed only about $55 billion worth market by opting to do cross-border
original reporting, Grant Thornton
of deals during the first half of 2008, deals. Middle-market investment banking
compiled the white paper to give readers a
making it extremely doubtful that 2008 firms, like Harris Williams & Co. for
better understanding of where the middle
will reach the $475 billion in deals example, say that they expect to spend
market is today, how it got there and
completed in 2007. more time on globalization and emerging
where it is heading.
markets, and they see their clients also
doing so in the next year.
Top trends in middle-market private equity 1

4. With the lines blurring between private equity firms,
hedge funds, lenders and bankers, private equity firms
are emerging as asset managers.
A third trend is the hiring of The fourth trend affecting the private Lastly, with the lines blurring
operational partners, representing equity community is the emergence of between private equity firms, hedge
another way private equity firms have sovereign wealth funds (SWFs). Morgan funds, lenders and bankers, private equity
been able to transform themselves. Hiring Stanley researchers say SWFs, mainly in firms are emerging as asset managers.
operational partners is a recent Asia and the Middle East, poured around This trend has already begun to take
phenomenon. While larger firms always $45 billion into a range of companies and place in the larger market, and is now
put big-name advisors on their letterhead, assets in 2007 alone. Some analysts believe emerging in the middle market. Many
middle-market firms have increasingly SWF assets could reach $15 trillion by believe it is the natural evolution of the
been hiring partners who don’t 2015. SWFs are here to stay; they will industry. This white paper explores what
necessarily have private equity have an increasing long-term impact on firms are doing to drive this trend, and
knowledge, but who do possess expert the marketplace. what some middle-market private equity
knowledge in a particular sector. Touting The squeeze on middle-market managers think of it.
operational partners is a good way for compensation is the fifth significant trend.
firms to woo management teams in As the megafunds have grown even larger,
today’s market, where competition for they have hired more talent to broaden
quality deals is more fierce than ever. their scope, luring private equity talent
Bringing extra capabilities to the away from middle-market firms. This
bargaining table can only help firms white paper discusses practices that
become more competitive. middle-market firms are using to retain
top talent.
The sixth trend is that certain industry
sectors have remained particularly strong,
despite the global credit crisis. The
technology, health care and energy sectors
continue to present strong investment
opportunities and are expected to do so
for years to come.
2 Top trends in middle-market private equity

5. The impact of the credit crunch
In August 2007, the credit markets began
Figure 1.1
their contraction, leaving the private All North American M&A activity*
equity market in a very different place For the years ended Dec. 31, 2001-07, and the period
Jan. 1-May 6, 2008, annualized
than it had been for the previous five
years. Gone are the days of frenzied
Deal value in billions Number of transactions
dealmaking; back are the days of caution
1,892
and careful due diligence. 1,799
For the next year or so, fewer deals in
general are expected to be completed. As 1,371
Figure 1.1 demonstrates, M&A activity 978 967 899
remains down, regardless of deal size.
587
However, M&A activity for deals larger 478
than $500 million has slowed considerably
more than smaller deals (see Figures 1.2
2001 2002 2003 2004 2005 2006 2007 2008
and 1.3). In addition, there has been a Annualized
Source: Harris Williams & Co. compiled from third-party sources
decrease in capital put into new private
equity deals. *Excludes minority stake purchases, acquisitions of remaining interest,
self-tenders and repurchases
Figure 1.3
Figure 1.2
M&A large-cap transaction activity
M&A middle-market transaction activity
For the months ended Jan. 1, 2007-April 30, 2008
For the months ended Jan. 1, 2007-April 30, 2008
Deal value in billions Number of transactions
Deal value in billions Number of transactions
75.0
$30 $300
150
62.5
$25 $250
125
50.0
$20 $200
100
37.5
$15 $150
75
25.0
$10 $100
50
12.5
$5 $50
25
0.0
$0 $0
0
11 7
7
7
11 7
7
7
07
07
07
07
07
07
07
07
07
/0
/0
/0
08
08
08
08
07
07
07
07
07
07
07
07
07
/0
/0
/0
08
08
08
08
10
12
1/
2/
3/
4/
5/
6/
7/
8/
9/
1/
2/
3/
4/
10
12
1/
2/
3/
4/
5/
6/
7/
8/
9/
1/
2/
3/
4/
Source: Harris Williams & Co. compiled from third-party sources
Source: Harris Williams & Co. compiled from third-party sources
Top trends in middle-market private equity 3

6. not disclosed, but the Dealmaker
While private equity deals smaller
Figure 1.4 Figure 1.5
estimates the price tag to be a bit over
than $750 million experienced a less sharp Private equity volume Private equity volume
$100 million, which pales in comparison
decline in the number of deals than the for deals less than for deals larger than
$750M $750M to Carlyle’s $6.3 billion Manor Care deal
larger-size deals market, total deal volume
last year. The Authentix deal was
is down from a year ago (see Figures 1.4 No. of Value No. of Value
completed using capital from its Carlyle
and 1.5). Overall in 2007, private equity deals (millions) deals (millions)
U.S. Growth Capital fund, while the
firms put $474.8 billion of capital into
2000 179 $20.1 2000 13 $ 19.8
Manor Care deal was completed using the
U.S. deals, marking the third straight year 2001 84 5.3 2001 5 6.2
firm’s main buyout fund. This would
of record volume. For the first half of 2002 75 6.8 2002 11 21.9
2003 82 7.9 2003 8 13.5 seem to indicate that Carlyle has been
2008, a paltry $63.2 billion of U.S. deal
2004 110 15.9 2004 31 56.7
focusing more on its growth buyout
volume was recorded (see Figure 1.6). 2005 137 24.8 2005 29 87.5
practice rather than its large buyout fund
“It’s still a good time for clean 2006 153 24.6 2006 66 349.1
2007 140 25.4 2007 53 289.3 for which it is more widely known.
companies to sell in the middle market,”
2008 50 6.9 2008 9 13.9
Other large private equity firms have
says Mark Jones, a partner with River
decided to raise dedicated middle-market
Associates Investments LLC. “If the Source: Thomson Reuters Source: Thomson Reuters
funds for the first time. At the beginning
companies are of real quality, the debt
of the year, TPG Capital raised $1.2
sources are there. In fact, it’s a good time
billion to invest in middle-market
for traditional debt players, as well. It’s Figure 1.6
Private equity deals completed and funds
buyouts. And in April, Silver Lake held a
less competitive for them without all the
raised through June 13, 2008
final closing of Silver Lake Sumeru, its
CLOs [collateralized loan obligations]
inaugural middle-market investment fund,
and BDCs [business development 2007 2008 Billions
with $1.1 billion of equity capital
companies] that private equity firms were Deals $474.8
completed 63.2 commitments.
using. Mezz guys [mezzanine investors]
“Getting out of your comfort zone is
are a lot busier and getting involved in Buyout funds $292.2
raised 133.6 a formula for disaster,” says Jay Jester, a
larger transactions these days, but at very
managing director with Audax Group.
safe multiples. There are opportunities in Source: Thomson Reuters
“A couple of the megafunds will put some
the middle and lower ends of the market.”
dollars to work on smaller deals, but
Even though middle-market firms are
when the market comes back, they will
best at weathering the storm, deal Most of the decrease in activity has
leave. I prefer to focus on the 300 to 400
professionals are certainly feeling less come from the large market. As a result of
formidable middle-market firms that
optimistic. According to the December large-market firms’ inability to access debt
really present competition.”
2007 ACG/Thomson Financial survey, to complete megadeals, many of them
With larger competitors moving into
dealmaking professionals were less have moved downstream. However, not
their turf, a flight to quality and harder-
optimistic about the strength of the M&A all mega-firms are taking the same
to-come-by debt (see Figure 1.7), middle-
market at the end of 2007 than they were approach. For example, The Carlyle
market dealmakers are feeling pinched.
earlier at midyear 2007. Thirty-eight Group partnered with J.H. Whitney &
percent of survey respondents rightly Co., a middle-market buyout firm, to buy
expected transaction levels to drop in Dallas-based Authentix, which develops
2008. That was more than double the and delivers authentication and brand
number of respondents who in August protection devices. Financial terms were
2007 thought levels would drop at the
same time last year. To be fair, last year’s
Figure 1.7
survey was taken when dealmakers were
Average leverage as a multiple of EBITDA for middle-market LBO deals
still in a hot M&A market and the drop- For the years ended Dec. 31, 2001-07 and Q1 2008
off had not yet hit, whereas the May 2008
7-year average: 4.3x 5.6x
ACG/Thomson Reuters survey was taken
4.7x 4.7x 4.5x
4.3x
3.8x
as we continue to be, arguably, in the 3.8x
3.4x
worst of it.
2001 2002 2003 2004 2005 2006 2007 2008
Total debt
Source: S&P Leveraged Loan Review
4 Top trends in middle-market private equity

7. Some private equity firms have set
Figure 1.9
their sights on smaller deals, as well. In SF BDC price index two-year performance
April, Norwest Equity Partners bought As of May 30, 2008
Shock Doctor, a sports protection Millions
equipment company. The property was 200
acquired exclusively with equity provided 190
by Norwest and the management team.
180
The price tag was below what Norwest
170
usually pays for a deal, making it possible
160
to get the deal done debt free.
The type of debt available for deals has 150
also changed radically over the past year. 140
There’s been an enormous contraction in 130
the pool of debt buyers for new issuances, 120
particularly among collateralized debt and
110
loan obligations. According to Standard
07
06
8
07
7
6
06
8
7
7
/0
5/
/0
/0
/0
/0
5/
/0
4/
6/
16
/0
23
28
22
13
/1
04
& Poor’s, in the first half of 2008,
/1
/0
10
5/
2/
7/
12
2/
7/
5/
12
10
collateralized debt obligations (CDOs)
Source: Factset
fell for the first time since 2004. What’s
more, Lehman Brothers estimated there
would be only $30 billion to $35 billion in
new CLOs issued in 2008 — a 60 percent Figure 1.10
Performance of top four BDCs from January to May 2008
drop from 2007 levels.
As of April 2008, the number of U.S. Total return 1 2 1 3 5 QTD YTD
(millions) month month year year year
CDO managers on the league tables,
which include CLO issuance, was small, BDCs ~500+ million market cap
with only five banks issuing deals, ALD Allied Capital -21% -17% -44% -21% 6% -10% -20%
ACAS American Capital -5% -15% -29% 10% 73% -12% -6%
according to Thomson Reuters
AINV Apollo Investment Management 2% 17% -18% 32% - 9% 4%
(see Figure 1.8). ARCC Ares Capital Corp. 1% -8% -26% -10% - -5% -15%
Source: Stifel Nicolous
BDCs appear to be out of favor. At the same time that BDCs started
Figure 1.8
Depressed valuations of publicly traded on a downward spiral, the Financial
Collateralized debt obligations for Q2 2008
BDCs, which were once a strong source Accounting Standards Board (FASB)
Name Market No. of Total of debt financing for middle-leveraged implemented the fair value accounting
share deals issuance
buyouts (LBOs), are also gone (see rule FASB 157, which requires the BDCs
(billions)
Figure 1.9). to set the value of their private portfolio
Citigroup Global 38% 5 $2.3
By the end of May 2008, almost every companies to fair value based on public
Morgan Stanley 21% 3 1.3
single BDC was trading below its book market data or other market comparables.
JPMorgan Securities 21% 3 1.2
Barclays Capital 10% 1 .608 value as investors anticipated write-downs Many private firms are anticipating write-
Lehman Brothers 10% 2 .605
(see Figure 1.10), according to an index of downs as a result of the poor performance
BDCs compiled by analysts at investment of BDCs due in part to the impact of
Source: Bank Loan Report/Thomson Reuters
bank Stifel Nicolaus. A depressed stock FASB 157.
price makes it difficult for BDCs to
originate new loans, drying up more
liquidity in the middle-market debt arena.
Top trends in middle-market private equity 5

8. seeing an uptick because of that. There’s
In fact, several BDCs are faced with
Figure 1.11
also been a resurgence of mezz in the
the prospect of running out of capital in Mezzanine funds raised 2000 through Q1 2008
market. But you can’t get the mezz
the near future. For example, as of press
Fund raised No. of funds without the senior debt first.”
time, if Apollo Investment Corp.
(millions)
The last result of the credit crunch we
followed its historic investment pace, the
2000 $ 7,488.2 38
will discuss is that it has given strategic
BDC was facing the prospect of having
2001 11,130.9 25
buyers a chance to get back in the game.
less-than-desired investment funds by 2002 2,636 25
According to Harris Williams, strategic
March 2009, according to Stifel Nicolaus’ 2003 5,423.1 28
2004 4,613.7 32 buyers remain aggressive for quality
estimates. Meanwhile, as of press time,
2005 8,958.6 42
assets. The firm has seen a significant
MCG Corp. was virtually out of capital, 2006 1,7474 46
increase in strategic buyer interest in
while Ares Capital Corp., operated by 2007 17,167.2 44
2008 18,186.8 11 recent months. The firm, which has
Ares Management, was looking at hitting
historically sold about 50 to 60 percent of
its ceiling by the end of 2008. American
Source: Thomson Reuters
its client companies to strategic buyers,
Capital Strategies had enough funds to
has sold more than 70 percent of its client
last into the beginning of 2009.
companies to strategic buyers since
“Nearly all the BDCs are trading
December 2007. “We expect to see more
below book value, and it’s much more Indeed, the trouble in the credit
activity from the strategics in coming
difficult for them to raise capital,” says markets has turned out to be good for
months,” says Hiter Harris, co-founder of
Greg Mason, a senior equity analyst traditional mezzanine lenders in the
Harris Williams (see Figure 1.14).
covering BDCs for Stifel Nicolaus. “The marketplace. As Figure 1.11 shows, the
BDCs would be putting the money to amount of mezzanine capital raised in the
work if they weren’t so constrained, but first half of 2008 was at $18 billion,
new capital is very expensive, which is $1 billion more than the amount of capital
forcing the BDCs to slow their debt raised in all of 2007. The percentage of
Figure 1.14
investments into private equity deals. We mezzanine going into deals has increased, In the next six months, what is the greatest
expect the BDCs to remain under this as has the equity contribution (see Figure opportunity for liquidity events for your
portfolio companies?
pressure for at least the rest of 2008 and 1.13). Reliable senior lenders are also in
into 2009.” demand these days (see Figure 1.12).
As a result of the issues BDCs are Andy Steuerman, a senior managing Sale to
strategic
facing, mezzanine debt has become more director with Golub Capital, explains, buyer 72%
prevalent. “Mezzanine partners that have “We have been very active on the senior
Sale to
proven out their willingness and side because we continue to raise more financial
partnership mindset are at a premium capital and we have stuck by our buyer 22%
these days,” says Audax Group’s Jay relationships and supported the firms that IPO 3%
Jester. “People aren’t looking for the very have supported us. It’s hard to find a
Other 3%
cheapest dollar anymore.” reliable lender these days and we are
Source: ACG Thomson Survey
Figure 1.13
Figure 1.12
Equity contribution
Average purchase price and equity contribution by sponsor
For the years ended Dec. 31, 2000-07, and Q1 2008
For the years ended Dec. 31, 2000-07, and Q1 2008
50%
Senior debt Sub and other debt Equity
9.3x
8.5x 45%
8.4x
8.1x
3.4x
7.2x
7.0x
6.9x 6.7x 3.4x
40%
3.3x
5.9x 3.9x
2.9x 0.5x
2.9x 3.2x
2.9x
0.5x
2.5x 0.6x 35%
0.5x
0.9x
0.9x 0.7x 0.9x
0.8x 5.4x
4.1x
4.6x 30%
4.0x
3.5x
3.1x 2.6x 3.1x 2.9x
25%
2001 2001 2002 2003 2004 2005 2006 2007 2008 2000 2001 2002 2003 2004 2005 2006 2007 Q1 2008
Source: Harris Williams & Co. compiled from third-party sources
Source: Harris Williams & Co. compiled from third-party sources
6 Top trends in middle-market private equity

9. The explosion of cross-border activity
Figure 2.1 Figure 2.2
Office locations of the five largest private equity firms Office locations of the five largest middle-market private equity firms
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●
●
●
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●
Firms represented ●
Firms represented
TA Associates
The Carlyle Group
Sun Capital Partners
Warburg Pincus
American Capital Strategies
The Blackstone Group
Advent International
KKR
Riverside & Co.
Bain Capital
Cross-border M&A has become an Going global is not new. Large-market
increasingly vital part of strategic plans for U.S.-based private equity firms started
middle-market companies and private opening up offices overseas to pursue
equity firms. Large U.S.-based private opportunities in the late 1990s. Today, the
equity firms have already proven that five largest private equity firms cover the
doing business in different parts of the world with offices (see Figures 2.1). U.S.
world often equates to success in today’s middle-market firms have taken this cue
rapidly growing global economy. Reasons and have also started expanding globally
to go global include the need for (see Figure 2.2).
geographic diversification, the availability
of good acquisition candidates in places
outside the United States, the need to
outsource divisions of portfolio Cross-border M&A has become an increasingly vital part
companies to places where there are
of strategic plans for middle-market companies and private
cheaper labor costs, and the continued
equity firms.
consumer growth in emerging markets.
Top trends in middle-market private equity 7

10. Figure 2.4
Figure 2.3
Private equity deals completed and funds
Cross-border M&A volume
raised through June 13, 2008
Rank value in millions Percent of global
2007 2008 Billions
50%
$1,500
Deals $474.8
45%
$1,200 completed 63.2
40%
$900
Buyout funds $292.2
35%
raised 133.6
$600
30%
Source: Buyouts
$300 25%
$0 20%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007*
*Ending June 30, 2008
Source: Thomson Reuters
Figure 2.3 illustrates the proliferation
Figure 2.5 Figure 2.6
of cross-border M&A activity over the Where do you expect most cross-border Private equity volume by U.S. firms outside
past 10 years. There has certainly been a activities to take place? of the United States
decline in U.S. private equity deal flow
Value ($ billions) No of deals
Western Europe 59%
(see Figure 2.4) making overseas activity
Canada 38%
more attractive. According to the May 2000 $ 27 240
2001 21 150
China 28%
2008 ACG/Thomson Reuters survey, 28
2002 29 126
percent of middle-market firms say their United States 25%
2003 45 185
firms participated in a cross-border deal in 2004 61 255
Latin America 20%
2005 78 288
the first half of 2008, and more than 55 India 19%
2006 131 362
percent of respondents say their firm is 2007 194 486
Eastern Europe 16%
likely to complete a cross-border deal in
Middle East/Africa 11% Source: Thomson Reuters
the next six months. Additionally, more
Other 25%
than 40 percent of respondents say that
cross-border deals will become Source: ACG Thomson Survey
increasingly more important to their firms
over the next few years; 20 percent of
respondents believe the best way to “There’s still a market for any kind of
weather the current environment in the company anywhere, but the private
United States is to diversify equity firms that have the foresight to go
geographically. Figure 2.5 shows where to areas where there is higher growth and
middle-market private equity firms mitigated risk will do well,” says Michael
believe they will be active in the next six Gibbons, a senior managing director at
months. Brown, Gibbons, Lang & Co. “A great
What’s more, private equity deal number of firms are doing cross-border
volume by U.S. firms outside the country deals. We recently did a deal in Hungary
reached $194 billion in 2007, the highest for The Riverside Co. and one in
ever, and that trend is expected to Germany for Sun Capital. We will
continue (see Figure 2.6). continue to see this type of activity.”
8 Top trends in middle-market private equity

11. Figure 2.7 lists select activity by U.S.
Figure 2.7
private equity firms overseas since the Select list of U.S. private equity firms that have participated in cross-border activity since the
beginning of 2008. beginning of 2008
The list — small, but telling —
Firm Funds raised Office opening
suggests that firms are rushing to get
overseas. However, the two areas in which Acon Investments Mexico and Brazil
U.S.-based firms have the most interest
Bear Stearns Cos. and Chinese bank Citic $1 billion Asian joint venture
are China and India. Developing
Securities Co.
countries, particularly the BRIC countries
(Brazil, Russia, India and China), present Brysam Global Partners new private equity firm
unique opportunities to access growing
€1.06 billion
Englefield Capital
new markets. Although Asian investment
was once considered principally a means Arsenal Capital Shanghai
of enhancing manufacturing potential for
Sun Capital Partners $6 billion fund Tokyo
products destined for Western markets,
the vast markets that these economies JPMorgan Stockholm, Sweden
represent cannot be ignored. Although
H.I.G. Capital London
China is geographically smaller than the
United States, its population is three to Morgan Stanley $1.5 billion Asia
four times greater: about 1.3 billion.
Global Infrastructure Partners Hong Kong
Imagine a potential middle-class
consumer market equal to the entire Baird Private Equity China
population of the United States, and you
Morgan Stanley India
can easily see why investors view China
and other Asian countries as a market
€1 billion
Summit Partners European private equity fund
opportunity rather than simply a place for
low-cost manufacturing (see Figure 2.8). Sun European Partners Paris and Frankfurt
The same can be said for India and other Note: As of press time, not all firms raised a dedicated fund in conjunction with opening an office overseas.
developing countries.
Source: Grant Thornton Research
“There has been a lot of buzz around
India and China for several years,” says
Dennis White, a corporate partner in the
Boston office of McDermott Will &
Emery LLP and vice-chairman of ACG.
“People are very interested in those Competition for good acquisition Figure 2.8
regions, and things are starting to happen. targets in the United States has been fierce What are the reasons for going to China?
But there’s still a larger volume of cross- and has become even more so in the new
Produce or source goods or services in China
border activity in the UK, Europe and environment. Competition has led to for the China market 51%
Canada.” McDermott Will & Emery more firms looking at cross-border deals;
Produce or source
recently initiated an alliance with MWE having an actual footprint abroad is goods or
China Law in Shanghai to meet the needs services in
something most firms believe is
China for the
of their clients. “Everyone is looking for important. U.S. market
16%
opportunities anywhere they can find
them,” says White. Produce or
source
goods or
services in
China for other
(non-U.S./non-China
markets) 8%
Import into China 19%
Other 6%
Source: 2008 AmCham Business Climate Survey
Top trends in middle-market private equity 9

12. Best practices To support all the cross-border Figure 2.10
“There’s an invaluable benefit of having a activity and globalization, many service Private equity deal volume by all
local presence,” says Steve Collins, a providers have also opened offices around private equity firms outside U.S.
managing director with Advent the world. Lincoln International opened
Value Deals
International. “It’s hard enough to get a eight new offices recently: five in Europe, (billions)
deal done in a country where you know the latest in Madrid. Meanwhile,
2000 $ 60 1,347
the local customs and laws — forget about Houlihan Lokey opened a Tokyo office. 2001 61 1,058
a foreign country. Not all markets need a Proskauer Rose opened an office in 2002 68 859
2003 101 1,165
local presence, but most do.” Brazil, and Simpson Thacher moved into
2004 145 1,506
White agrees. “It’s easier to do deals in Beijing. Heller Ehrman LLP opened in 2005 204 2,020
the UK than in China,” he says. “There London — its first European office and its 2006 356 2,515
are varying degrees of a presence needed. fourth outside of the United States. 2007 408 3,082
2008* 71 791
Having a presence on the ground and Kirkland & Ellis LLP opened an office in
relationships with local banks and firms Hong Kong and Grant Thornton has a *Ending April 2008
can make all the difference. The customs presence in more than 100 countries: 60 of Source: Thomson Reuters
and cultural issues can make a big these member firms have experienced
difference in getting a deal done.” local M&A professionals serving clients.
Figure 2.11
The opportunity available in Still, the pendulum swings in both
Non-U.S. based private equity
developing regions is not just for U.S. directions. While there has certainly been fundraising
private equity firms. In the past year, a push for U.S-based private equity firms
Fund raised Deals
many European-based firms have also to move overseas, many private equity
(billions)
moved into the growing territories. firms located outside the United States
2000 $26 101
Figure 2.9 lists non-U.S. firms that have decided to move in to take advantage
2001 25 89
recently have opened offices in of the weak dollar. Cinven, BC Partners, 2002 17 76
different regions. CVC Capital Partners, Permira and 3i 2003 27 76
2004 23 91
Group all opened offices in New York
2005 66 105
during the past few years. The presence of 2006 91 133
these new offices underscores a deal trend 2007 75 118
2008* 22 34
that has been growing for at least five
Figure 2.9
Select list of non-U.S. firms that have opened
years: European private equity firms are *Ending April 2008
offices abroad
hungry for North American targets. For
Source: Thomson Reuters
example, in 2003, European private equity
Firm Office opening/
country of deal
firms paid $622.7 million for a total of
23 U.S.-based companies, according to Impact
Adveq Beijing
Champ Private Equity Singapore Private equity firms and companies that
Thomson Financial. Last year, that
Istithmar Shanghai
support the private equity industry are
number grew to $27.7 billion for 63 U.S.
Candover Hong Kong
expected to continue opening offices all
targets.
Bridgepoint Poland
FountainVest China over the world. Most private equity firms
“With the depressed U.S. dollar, it
Ontario Teachers’ Pension Plan London
will wind up being global to some degree.
makes sense for firms to have interest in
“The private equity industry is centered in
U.S. targets,” says McDermott Will &
Source: Grant Thornton Research
the U.S. and grew up in the U.S., but
Emery’s Dennis White (see Figures 2.10
taking it beyond the U.S. is a natural
and 2.11).
extension of the industry,” says Advent
International’s Steve Collins. “There may
be a slowdown in the near term, but
directionally, cross-border activity will
continue to grow.”
10 Top trends in middle-market private equity

13. The proliferation of operational
partners
Twenty-two percent of respondents to the When Lincolnshire Management From the largest private equity shops
May 2008 ACG/Thomson Reuters survey decided to hire James Binch as a senior like Bain Capital to the mid-market ones
cite strategic investors as one of the operating partner and managing director, like Industrial Growth Partners, firms are
greatest impediments to dealmaking the New York-based firm was looking for increasingly finding operations people
today. Increased competition from someone who was a capable fixer of invaluable to their teams.
strategics, coupled with the proliferation companies. After being a seller in the “A lot of firms are adapting an
of private equity firms, have made wooing marketplace until mid-2008, Lincolnshire operating partner model,” says Brian
management teams into a sale more decided it was time to become a buyer Korb, partner with Glocap, a private
challenging than ever, especially for teams again; and having someone to help equity recruitment firm. “And not
that plan on participating after the improve the performance of portfolio surprising, we have definitely seen an
increase in the hiring of these types of
buyout. Over the past couple of years, it companies made perfect sense. Prior to
individuals. These partners come with
has become more common for private joining Lincolnshire, Binch was president
additional credibility and a network that
equity firms to hire operational partners and CEO of medical component
can add value in a number of ways. They
in hopes of gaining a competitive edge. manufacturer Memry Corporation
can help with deal flow, apply best
According to the ACG/Thomson Reuters (AMEX: MRY). “What better person to
practices across portfolio operations and,
survey, about 80 percent of respondents hire than someone who has on-the-
when necessary, they can even parachute
believe there has been an increase in the ground experience,” says Bill Buttrick,
in and run them.”
number of private equity firms hiring communications director at Lincolnshire.
Another reason for the proliferation
operational partners. While these partners “It’s not primarily the sector experience
of operational partners is the need for
are not hired for their expertise with we’re interested in. Rather, we look for a
private equity firms to really showcase
private equity, firms expect them to have manager who is capable of getting on the
their capabilities to sellers, especially in
expansive knowledge of the sector they ground and figuring out what’s going on
this environment. Many dealmakers
worked in and be able to deliver added at a portfolio company quickly.”
believe that an operating partner gives
value to their portfolio companies. Lincolnshire is just one such firm that
has hired an operating partner lately. See them the edge (see Figures 3.1 and 3.2).
Figure 3.0 for recent examples of other “No matter how good an idea a
firms that have hired operating partners. private equity professional has, the
management team looks at a 40-year
veteran’s ideas differently because they
have sat in the same chair,” says Tim
Many dealmakers believe DeVries, managing general partner at
Norwest Equity Partners.
that an operating partner
gives them the edge.
Top trends in middle-market private equity 11

14. Figure 3.1
Select list of U.S. operating partners hired from January to June 2008
Private equity firm New hire Previous position Private equity focus
Advent International Pam Patsley First Data Corp. Financial services operating partners
Arcapita William Miller Boston Consulting Group Strategic performance
Arsenal Capital Partners Larry Resnick M&A Executive, Triumph Group Aerospace and defense
Arsenal Capital Partners Anthony Giorgio Corporate Development, SYMYX Technology Specialty chemical and materials
Blue Point Capital Thomas Cresante CEO Special Devices
Blue Wolf Capital Van Walbridge CEO of Mobile Tool International
Blue Wolf Capital Walter Stasik CEO of Genesis Worldwide II
Calera Capital Paul Walsh EFund Corp. Business and financial services
Calera Capital Clyde Thomas eFunds Corp. Business and financial services
Calera Capital (Fremont Partners) Michael Murray Head of I-bank with Bank of America
CCMP Capital John Bowlin Kraft Foods Consumer investments
CCMP Capital Denny Shelton CEO of Triad Hospitals Health care investments
DLJ Merchant Banking Neal Pomroy MD with Mercer Management Head of portfolio strategy
Doughty Hanson & Co. Adam Black Associate Director KMPG Oversee sustainability matters
Fidelity Equity Partners Gray Hall CEO of CeriCenter Inc.
Genstar Capital Paul Clark CEO of ICOS Corp. Biotech investments
Morgan Stanley James Howland President of Dun & Bradstreet
Natural Gas Partners Jack Holmes Syntroleum Corp. Deal generation
Navigation Capital Partners O.G. Greene CEO of Burroughs Corp., National Data Corp.
Norwest Equity Partners Jeffrey Greiner Founder of Wessels, Arnold & Henderson Technology add-ons
Pegasus Capital Advisors Steven Marton President of office products at Newell Rubbermaid
Providence Equity Partners Barry Allen VP of operations at Qwest Communications
Water Street Healthcare Partners Curt Selquist Johnson & Johnson
Welsh Carson Anderson & Stowe Stephen Larned Chief Marketing Officer DigitalGlobe
Welsh Carson Anderson & Stowe Daniel Lieber CEO of Union Site Management
WL Ross & Co. John Kanas CEO of North Fork Bank Distressed financial services opportunities
Source: Grant Thornton Research
necessary. And it helps to have an Impact
Figure 3.2
Private equity firms will continue to hire
operational partner when you are trying
Does having operational partners give
MBA students and investment bankers,
to buy a company. When there’s someone
private equity firms an edge when looking for
but they will increasingly seek out
from your group who can prove they
investments?
veteran operational partners. They will
have experience, management teams
Yes, it
continue to hire any professionals who
appreciate that, and it adds to the chances
demonstrates
knowledge may make them more competitive, even if
of working with them.”
and
it’s outside of what was once considered
Additionally, operational partners can
experience
in certain
the normal realm.
cut to the chase, getting a job done
markets
“If an operational partner can make a
quicker and with less trouble. “Firms
79%
5 percent to 10 percent impact on one of
realize that to stay competitive in this
No, it
our businesses, that puts us at a huge
current environment, they need to extract
doesn’t really
make a
advantage,” says Norwest’s Tim DeVries.
maximum value from their investments.
difference 21%
“Private equity has matured
They can hire outside consultants, but it
tremendously, and we all have to do a
pays off to have tactical in-house advisors
Source: ACG Thomson Survey
better job. Every increment helps. Some
you can also turn to,” says Glocap’s Brian
Lincolnshire’s Bill Buttrick explains, operational partners help us with contacts
Korb. “You can justify paying someone
“It makes sense to have an operational or give CEOs advice or set a great team in
$1 million a year if they are saving you
partner. A private equity company may place. All of those things help us perform
$10 million.”
own 15 portfolio companies and half may superiorly.”
run into the occasional trouble. You want
the ability to air-drop someone in who
can work with current management or in
a worst case scenario, replace them if
12 Top trends in middle-market private equity