Here’s something got me thinking about the private company opportunities. I’ve been lending
a hand to big-enough-to-be-public private company that’s raising money. They are selling about a 50% equity interest at a total-company valuation that’s about 3x last year’s EBITDA (realistically 2x 2011 EBITDA). There are several reasons for this (including liquidity of the investment) but the crux of it is (a) they – and their industry - had a remarkably crappy couple of years, but the industry is just recently legitimately turning around, and (b) they are caught in a downward ‘loan availability’ spiral with their lender (one of our favorite banks).
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- To digress a moment – we hear a lot about banks ‘not lending’, but revolving loans like this one’s are based on collateral – typically receivables and inventory – against which the bank loans vary each day, at predetermined percentages of the collateral. Total borrowing is capped, often at pre-recession levels. The cap is not typically the problem --it’s the collateral that limits borrowing. That’s usually fine as long as business is continually growing (at profitable pricing), but when business falters its particularly tough.
Nowadays, the upper borrowing limits haven’t changed, but when a company goes from growth-mode to a couple-of-year setback, it gets into a sort of mathematical downward spiral as to how much it can borrow (and as a result, how much new business it can take on), especially if the slump period was unprofitable. That spiral is really difficult to get out of even if customer demand turns around. For this company, their collateral-based loan limit has fallen to less than half the loan's maximum limit.
To add to the pressure, when it renegotiated terms awhile back, our favorite bank dramatically increased interest rates (to embarrassingly high levels) reflecting what it probably accurately perceived as industry and company-specific risk. There wasn’t much banking competition clamoring to steal the business at better terms.
Anyway, although the phone is ringing with orders, the company is in a liquidity bind.
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Back to the original point of all this. These past couple of years its been reported that private-company transactions are being valued at an average of 5x EBITDA. But those statistics are from M&A firm transactions – meaning there was an M&A participant in this mix, and these companies were likely competitively shopped, or sold to ‘strategic’ buyers less concerned with financial multiples.
Outside this arena, private valuations are often much, much more favorable (to the buyer), assuming there’s a proper assessment of risks and prospects. And we’re not talking mom & pop sized businesses. One characteristic of these transactions is the privacy. In this and so many cases, it’s important to the company's owner that its suppliers and customers (and probably peers) not see it sweat – at least not unduly.
It seems that this business isn’t alone. And this market segment is terribly inefficient in terms of valuation. For those with connections and some fortitude, this is an interesting area. A person with Buffett-type confidence and skills who's early in their career might be interested.
a hand to big-enough-to-be-public private company that’s raising money. They are selling about a 50% equity interest at a total-company valuation that’s about 3x last year’s EBITDA (realistically 2x 2011 EBITDA). There are several reasons for this (including liquidity of the investment) but the crux of it is (a) they – and their industry - had a remarkably crappy couple of years, but the industry is just recently legitimately turning around, and (b) they are caught in a downward ‘loan availability’ spiral with their lender (one of our favorite banks).
_____
- To digress a moment – we hear a lot about banks ‘not lending’, but revolving loans like this one’s are based on collateral – typically receivables and inventory – against which the bank loans vary each day, at predetermined percentages of the collateral. Total borrowing is capped, often at pre-recession levels. The cap is not typically the problem --it’s the collateral that limits borrowing. That’s usually fine as long as business is continually growing (at profitable pricing), but when business falters its particularly tough.
Nowadays, the upper borrowing limits haven’t changed, but when a company goes from growth-mode to a couple-of-year setback, it gets into a sort of mathematical downward spiral as to how much it can borrow (and as a result, how much new business it can take on), especially if the slump period was unprofitable. That spiral is really difficult to get out of even if customer demand turns around. For this company, their collateral-based loan limit has fallen to less than half the loan's maximum limit.
To add to the pressure, when it renegotiated terms awhile back, our favorite bank dramatically increased interest rates (to embarrassingly high levels) reflecting what it probably accurately perceived as industry and company-specific risk. There wasn’t much banking competition clamoring to steal the business at better terms.
Anyway, although the phone is ringing with orders, the company is in a liquidity bind.
_______
Back to the original point of all this. These past couple of years its been reported that private-company transactions are being valued at an average of 5x EBITDA. But those statistics are from M&A firm transactions – meaning there was an M&A participant in this mix, and these companies were likely competitively shopped, or sold to ‘strategic’ buyers less concerned with financial multiples.
Outside this arena, private valuations are often much, much more favorable (to the buyer), assuming there’s a proper assessment of risks and prospects. And we’re not talking mom & pop sized businesses. One characteristic of these transactions is the privacy. In this and so many cases, it’s important to the company's owner that its suppliers and customers (and probably peers) not see it sweat – at least not unduly.
It seems that this business isn’t alone. And this market segment is terribly inefficient in terms of valuation. For those with connections and some fortitude, this is an interesting area. A person with Buffett-type confidence and skills who's early in their career might be interested.
