When Norwest Equity Partners this month raised a record $2.4 billion to invest in promising private companies, it was just the latest evidence that confidence is back.
Institutional investors and investment bankers are engaging in deals at levels not seen since before the Great Recession.
“Things have been good-not-great in terms of the economy,” said Tim DeVries, veteran managing general partner at Norwest Equity Partners (NEP). “We would all love higher growth, but we’re continuing to move along and so is the economy. A good business has more than enough oxygen in the environment to survive, prosper and grow.”
Norwest Equity invests $50 million to $200 million per deal across a variety of industries. So far this year, NEP has invested in Eyebobs, a Minneapolis-based brand of reading glasses, and Tennessee-based Old Hickory Smokehouse, a maker of smoked meat products.
Those investments were two of the 96 transactions in which Minnesota companies were buyers or sellers in the first quarter of 2015, adding up to total deal volume of $27.5 billion, based on figures from Bloomberg.
The number of deals is in line with the same period last year and down slightly from the fourth quarter’s total of 110. But the combined dollar value is surpassed only by last year’s second quarter, when Medtronic’s announced purchase of Covidien sent that period’s total to nearly $51 billion.
Nationally in the first quarter there were 2,593 transactions worth $394.1 billion, up slightly from the fourth quarter and the first quarter of 2014, according to Thomson Reuters. And a postrecession record 269 companies raised $71.5 billion in equity through IPOs and follow-on sales of stock.
DeVries, 58, a 30-year-veteran of the private equity business, avoids getting caught up in the short-term numbers. Private equity investors typically buy a company, make investments or sell parts that aren’t working and install or work with existing managements to improve performance and sell the company at a profit five-to-seven years downstream. NEP says it, on average, doubles revenue and profitability of its target companies over its ownership period.
DeVries is getting a little cautious about prices for quality companies. They are rising fast. Buyers such as NEP today pay nine-to-12 times annual operating earnings before interest and tax expense for good performers compared to six-to-eight in 2010. However, in a mergers-and-acquisitions market fueled by plenty of cheap debt and willing equity investors, the deal makers are going to make a lot of money bringing together optimistic corporate buyers and happy sellers.
“The market is just fine,” said Scott LaRue, co-head of investment banking at Piper Jaffray & Co., which focuses on private transactions involving companies with sales of $100 million to $1 billion. “If anything, there may be a shortage of high-quality companies. Last year was a big M&A year and a lot of good deals got done. There will be deals done this year.
“The same conditions exist. Low rates, lots of credit available.”
The big corporate buyers, whether growing specialty manufacturer Graco or titanic UnitedHealth Group, both of which struck in the first quarter, are using debt and their own lofty stock prices as currency to add growth through acquisitions. Strong organic growth in a low-inflation economy marked by modest revenue increases has been tough to achieve in most industries. Deals are in.
“There’s lots of confidence in boardrooms,” LaRue said. “The economy has a modest tail wind. The corporate buyer was active last year and will be active again this year. I think 2015 will look like last year.”
The big Minnesota deals announced in the first quarter included:
• Publicly traded Life Time Fitness, the huge fitness-and-health company, will go private thanks to a $4 billion buyout led by CEO Bahram Akradi and private equity investors Leonard Green & Partners, TPG Capital Management and LNK Partners.
• The nation’s largest health insurer, Minnetonka’s UnitedHealth Group, paying $12.8 billion to acquire Schaumberg, Ill.-based Catamaran Corp. in a move to gain control over how more than 1 billion prescriptions per year are dispensed. UnitedHealth’s OptumRx unit was already No. 3 in the $300 billion business of managing prescription-drug benefits.
• Family-owned MOM Brands of Lakeville, parent of Malt-O-Meal hot cereal, will sell itself to Post Holdings, another huge cereal outfit, for $1.15 billion, in a pending transaction that has local employees, including a Malt-O-Meal plant in Northfield, worried about consolidation-related job losses.