Rsm pitch book_b2b_deal_flow_profile_1q_2013

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2012:Year inReview

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McGladrey announces the 2012 Year in Review Private Equity Deal Flow ProfileHeading into Q4 2012 there was much speculation as to how the impending threat of tax increases would impact private equity (PE) deal-making. Apparently, PE firms and business owners in the business products and services (B2B) space were eager to avoid higher taxes, as Q4 was the most active quarter for B2B deal-making in 2012. More significantly, the $32.6 billion invested was the highest quarterly total since Q4 2007, as investors focused their attention on large platform transactions. Of course, the rush to close deals before Jan. 1 could have ramifications for deal-making in the coming months. “I’m expecting Q1 to be relatively slow as a lot of deals were pulled into 2012 for obvious reasons,” says Milton Marcotte, practice leader of Transaction Advisory Services at McGladrey.

While B2B deal-making was down 9 percent from 2011 to 2012, there should be improved deal flow in the year ahead. “We are seeing improved financial results, which has led to additional deal flow and interest from the private equity space,” observes Benjamin Redman, director of Transaction Advisory Services at McGladrey. With continued macroeconomic uncertainty and the slow pace of growth in the United States and abroad, much of the improved performance at portfolio companies can be attributed to internal augmentations implemented by their PE sponsors. “We are seeing more effort to further enhance the operational aspects of companies, as investors recognize that economic growth is not strong and that value enhancement is going to come from performance improvement efforts,” explains Marcotte.

Despite the slowdown in new investments, B2B exit activity accelerated for the third straight year in 2012. The same forces that were propelling deal-making in Q4 were observed on the exits side as well, as PE firms realized more B2B investments than in any other quarter on record. Much of the exit activity throughout the year can be attributed to secondary buyouts, which have ballooned from 26 percent of B2B exits in 2009 to 52 percent in 2012.

Focusing on the middle market, McGladrey provides PE firms and their portfolio companies with integrated transaction advisory, tax, assurance and consulting services. Our work with 4,000 business and professional services companies and 1,100 PE firms gives us a deep understanding of the key trends impacting deal flow in the B2B industry.

Donald A. LipariNational Executive Director, Private Equity ServicesMcGladrey [email protected]

Milton MarcottePractice Leader, Transaction Advisory ServicesMcGladrey [email protected]

Mark GainesPartner, Business Products and Services PracticeMcGladrey [email protected]

Benjamin RedmanDirector, Transaction Advisory ServicesMcGladrey [email protected]



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B2B private equity deal flow

Deal-making and capital invested in the B2B industry were down slightly in 2012, as investors were largely in a holding pattern throughout the year due to uncertainty around taxation and the national political landscape. “Now that they have some clarity, sellers are getting back some of the motivation they previously had, which has brought multiple deals back to the table,” Redman says.

While PE investors exhibited some reservation in 2012, the performance of B2B companies continued to improve. “My clients had a strong year and are expecting 2013 to be that way as well,” says Mark Gaines, partner in the Business Products and Services Practice at McGladrey. “The fact that there is now some certainty with taxes will allow operating companies to make decisions moving forward.”

One factor that may have stifled deal-making recently is a lack of quality opportunities, which has driven up prices for the good companies that are available. “The companies that were going to market in 2012 were motivated highly by taxes and other factors, and the overall quality of those companies didn’t seem very good,” Marcotte observes. “It’s possible that the quality of

B2B private equity deal flow by quarter

Source: PitchBook

companies could improve in 2013 since the motivations to sell will be different.”

As many people anticipated, there was an uptick in deal-making in Q4 ahead of expected tax increases. Interestingly, while the number of deals increased 15 percent from Q3 2012, the amount of capital invested jumped 87 percent as investors concentrated their attention on making large platform acquisitions. The strong investment at the end of

2012 could be detrimental to deal-making in early 2013, but the slowdown may not be as bad as some predict. “Even though I think Q1 will be relatively slow, we have seen more deal activity from transactions that were not year-end dependent and were effectively deferred until 2013, because bankers and other service providers were so busy doing 2012 deals that they didn’t want to start them,” Marcotte explains.

Source: PitchBook

B2B private equity deal flow by year

$50 $57 $63 $45 $21 $20 $23 $10 $6 $6 $5 $8 $16 $21 $20 $30 $20 $17 $26 $25 $16 $17 $17 $32

266

309 275276

256

198

198

124

95

108

98

133 138 134

137

196

149157191

204

160154

150

172

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350

$0

$10

$20

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$70

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2007 2008 2009 2010 2011 2012

Capital invested ($B) # of deals closed

$43 $63 $70 $131 $215 $74 $26 $88 $88 $82

377

553

730

928

1,126

776

434

605701

636

0

200

400

600

800

1,000

1,200

$0

$50

$100

$150

$200

$250

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Capital invested ($B) # of deals



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$0

$20

$40

$60

$80

$100

$120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Buyout (excluding add-ons) Growth

Commercial products

47%

Commercial services

48%Transportation

5%

Other<1%

Deal flow details

Capital invested details

While the makeup of B2B investments was virtually unchanged from 2011 to 2012, there were wide deviations from quarter to quarter. For example, commercial products only represented 37 percent of B2B deals in Q3 2012 but accounted for 47 percent in Q4 2012. The large quarterly swings may be a function of the inconsistency in the quality of B2B deals that we touched on earlier. With B2B deal-making down on a year-over-year basis, the only sector to see more deals in 2012 was transportation, which increased its proportion of B2B deals from 5 percent in 2011 to 7 percent in 2012.

Looking at the longer term trends, it becomes apparent that the commercial products sector has seen significant expansion in recent years, growing from 36 percent of B2B deals in 2009 to 44 percent in 2012. Many of the businesses in the B2B industry are symbiotic in nature, so increased deal-making in one sector can have ripple effects through the industry. “As the products sector sees growth, it trickles down to the services side, which has been key for many of the industries I work with, particularly the basic human capital factors related to staffing and consulting,” Redman says.

Source: PitchBook

Source: PitchBook

Deal activity in Q4 2012 by sector

Median deal size ($M)

PE transactions (count) by sector

PE transactions ($ amount) by sector

Source: PitchBook

Source: PitchBook

The strong increase in deal volume in the commercial products sector in recent years has translated to a growing share of B2B capital invested as well, as the sector has increased from 29 percent in 2010 to 50 percent in 2012. However, commercial services was the only B2B sector to see capital invested increase from 2011 to 2012.

The rush to close deals before the end of the year was particularly evident when looking at larger transactions, as the seven biggest B2B deals of 2012 all closed in Q4. This rash of mega-sized deals, like the $3.46 billion carveout of Neodyne Industries and the $2

billion secondary buyout of Vivint, played a large role in increasing the median B2B buyout size 27 percent from 2011 to 2012.

The uptick in median buyout sizes may also be a reflection of the premium that investors have been willing to pay for top performing companies with the relative lack of quality opportunities in recent quarters. Redman has seen PE firms paying higher multiples for quality businesses, including additional auction processes and competitive bidding. As Marcotte put it, “It’s a seller’s market if you have a quality company.”

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011 2012

Commercial products Commercial services Transportation Other

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011 2012

Commercial products Commercial services Transportation Other



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0%

10%

20%

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40%

50%

60%

0

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2006 2007 2008 2009 2010 2011 2012

Add-on Non add-on Add-on % of buyout

Add-on deals in the B2B industry

Select B2B Q4 2012 transactions

Source: PitchBook

Add-on deals as a percentage of buyouts

As we touched on earlier, there was a high number of platform acquisitions in Q4, which played a role in driving the percentage of add-on deals down to 42 percent, which is the lowest level since Q3 2011. Now that many investors have completed their platform acquisitions, however, there is expected to be heightened add-on activity in the year ahead.

“Our clients have already told us that they expect to be very active for add-ons in 2013,” Marcotte says. “I think firms tried to

grab the attractive platforms when they were available, and I see a reset and refocus on the add-ons now.”

Over the last couple of years, add-ons have been one of the primary ways that PE firms have looked to enhance the operational side of their portfolio companies. One of the key things for PE firms moving forward will be how they integrate their add-on acquisitions into their platform companies, especially when preparing for exit, according to Gaines.

Company name Investor Sector Amount ($M)Neodyne Industries

VivintVeolia Environmental Services Solid WasteWilsonart Int’l HoldingFleetPrideSGS InternationalGCA Services GroupCenterplateCoHo DistributingSequa Automotive GroupNES Global Talent

The Carlyle GroupBC PartnersThe Blackstone GroupHighstar Capital

Clayton, Dubilier & RiceTPG CapitalOnex PartnersThe Blackstone GroupOlympus PartnersMeritage GroupThe Jordan CompanyAEA Investors

Commercial products

Commercial servicesCommercial services

Commercial productsCommercial productsCommercial servicesCommercial servicesCommercial servicesCommercial productsCommercial productsCommercial services

$3,460

$2,000$1,909

$1,050$1,000

$813$715$551$500$400$376

Source: PitchBook



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Commercial products

52%

Commercial services

45%

Transportation3%

0

10

20

30

40

50

60

70

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2006 2007 2008 2009 2010 2011 2012

Corporate acquisition IPO Secondary buyout

Exit activity in the B2B industry

Source: PitchBook

B2B private equity exits (count) by exit type

B2B private equity exits (count) by exit type B2B private equity exits in Q4 2012 by sector

The major story in B2B exits in 2012—and over the last few years—has been the increasing number of secondary buyouts. B2B exit activity has increased three consecutive years now, and virtually all of that growth can be attributed to secondary buyouts, which spiked 506 percent from 2009 to 2012. “It seems like we’re involved in more and more secondary buyouts, and I think it’s because there aren’t that many good companies out there to buy,” asserts Marcotte. “Typically, if a PE firm is exiting, it’s a pretty good company. There is a lot of PE capital on the sidelines and [PE-backed businesses] are the good companies in the marketplace, so PE firms are buying them.”

Exit activity should only continue to accelerate in 2013 and beyond as the performance of B2B companies steadily improves

and PE firms have a need to realize aging investments. “As you see positive year-over-year results, it should be beneficial for exit activity,” says Redman. “Many of the entities I look at from a commercial services standpoint may not be back to ‘06 and ‘07 levels, but they’re certainly trending to hopefully be there within a few fiscal years.”

While the fiscal cliff issue has not been fully resolved, it appears that investors are becoming accustomed to the high levels of uncertainty. “There is some uncertainty in the overall marketplace and concern about the midterm economic outlook, so this is as good a time as any to be positioning and selling companies,” explains Marcotte.

Source: PitchBookSource: PitchBook

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Corporate acquisition IPO Secondary buyout



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Business Products and Services (B2B)

The following list shows a detailed breakdown of the PitchBook industry codes for the business products and services industry.

1.1 Commercial products

1.1.1 Aerospace and defense

1.1.2 Building products

1.1.3 Distributors and wholesale

1.1.4 Electrical equipment

1.1.5 Industrial supplies and parts

1.1.6 Machinery

1.1.7 Other commercial products

1.2 Commercial services

1.2.1 Accounting, audit and tax services

1.2.2 BPO and outsource services

1.2.3 Construction and engineering

1.2.4 Consulting services

1.2.5 Education and training services

1.2.6 Environmental services

1.2.7 Human capital services

1.2.8 Legal services

1.2.9 Logistics

1.2.10 Media and information services

1.2.11 Office services

1.2.12 Printing services

1.2.13 Security services

1.2.14 Other commercial services

1.3 Transportation

1.3.1 Air

1.3.2 Marine

1.3.3 Rail

1.3.4 Road

1.3.5 Infrastructure

1.3.6 Other transportation

1.4 Other business products and services

1.4.1 Buildings and property

1.4.2 Conglomerates

1.4.3 Government

1.4.4 Other business products and services

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Rsm pitch book_b2b_deal_flow_profile_1q_2013