1. Business Products
and Services:
McGladrey® Quarterly
Private Equity Deal
2012:
Insight | Analysis Year in
SM
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2. Business Products and Services
McGladrey announces the 2012 Year in Review
Private Equity Deal Flow Profile
Heading 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. Lipari Mark Gaines
National Executive Director, Private Equity Services Partner, Business Products and Services Practice
McGladrey LLP McGladrey LLP
212.372.1235 312.634.4515
don.lipari@mcgladrey.com mark.gaines@mcgladrey.com
Milton Marcotte Benjamin Redman
Practice Leader, Transaction Advisory Services Director, Transaction Advisory Services
McGladrey LLP McGladrey LLP
312.634.3143 212.372.1868
milton.marcotte@mcgladrey.com benjamin.redman@mcgladrey.com
www.mcgladrey.com [1] www.pitchbook.com
3. Business Products and Services
B2B private equity deal flow
B2B private equity deal flow by quarter
$70 350
309 275
$60 266 276 300
256
$50 250
198 196 204
191
$40 172 200
198 149157 154
$30 124 133 138 134 160 150
108 150
137
$20 100
95 98
$10 50
$50 $57 $63 $45 $21 $20 $23 $10 $6 $6 $5 $8 $16 $21 $20 $30 $20 $17 $26 $25 $16 $17 $17 $32
$0 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2007 2008 2009 2010 2011 2012
Capital invested ($B) # of deals closed
Source: PitchBook
Deal-making and capital invested in
the B2B industry were down slightly B2B private equity deal flow by year
in 2012, as investors were largely in a
holding pattern throughout the year $250 1,126 1,200
due to uncertainty around taxation and
the national political landscape. “Now 928 [2] 1,000
$200
that they have some clarity, sellers are
776
getting back some of the motivation 730 701 800
they previously had, which has brought $150 605
multiple deals back to the table,” 553
600
Redman says. 636
$100 377
400
While PE investors exhibited some 434
reservation in 2012, the performance of $50
B2B companies continued to improve. 200
“My clients had a strong year and $43 $63 $70 $131 $215 $74 $26 $88 $88 $82
are expecting 2013 to be that way as $0 0
well,” says Mark Gaines, partner in the 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Business Products and Services Practice
at McGladrey. “The fact that there is now Capital invested ($B) # of deals
some certainty with taxes will allow Source: PitchBook
operating companies to make decisions
moving forward.” companies could improve in 2013 since 2012 could be detrimental to deal-
the motivations to sell will be different.” making in early 2013, but the slowdown
One factor that may have stifled deal- may not be as bad as some predict.
making recently is a lack of quality As many people anticipated, there was “Even though I think Q1 will be relatively
opportunities, which has driven up an uptick in deal-making in Q4 ahead slow, we have seen more deal activity
prices for the good companies that are of expected tax increases. Interestingly, from transactions that were not year-
available. “The companies that were while the number of deals increased 15 end dependent and were effectively
going to market in 2012 were motivated percent from Q3 2012, the amount of deferred until 2013, because bankers
highly by taxes and other factors, and capital invested jumped 87 percent as and other service providers were so
the overall quality of those companies investors concentrated their attention busy doing 2012 deals that they didn’t
didn’t seem very good,” Marcotte on making large platform acquisitions. want to start them,” Marcotte explains.
observes. “It’s possible that the quality of The strong investment at the end of
www.mcgladrey.com [2] www.pitchbook.com
4. Business Products and Services
Deal flow details
Deal activity in Q4 2012 by sector PE transactions (count) by sector
100%
80%
Commercial
services
48% 60%
Transportation
5%
40%
Other 20%
Commercial <1%
products
47% 0%
2007 2008 2009 2010 2011 2012
Source: PitchBook Commercial products Commercial services Transportation Other
Source: PitchBook
While the makeup of B2B investments was virtually unchanged Looking at the longer term trends, it becomes apparent that
from 2011 to 2012, there were wide deviations from quarter to the commercial products sector has seen significant expansion
quarter. For example, commercial products only represented in recent years, growing from 36 percent of B2B deals in 2009
37 percent of B2B deals in Q3 2012 but accounted for 47 to 44 percent in 2012. Many of the businesses in the B2B
percent in Q4 2012. The large quarterly swings may be a industry are symbiotic in nature, so increased deal-making in
function of the inconsistency in the quality of B2B deals that one sector can have ripple effects through the industry. “As the
we touched on earlier. With B2B deal-making down on a year- products sector sees growth, it trickles down to the services
over-year basis, the only sector to see more deals in 2012 was side, which has been key for many of the industries I work with,
transportation, which increased its proportion of B2B deals particularly the basic human capital factors related to staffing
from 5 percent in 2011 to 7 percent in 2012. and consulting,” Redman says.
Capital invested details
Median deal size ($M) PE transactions ($ amount) by sector
$120 100%
$100 80%
$80
60%
$60
40%
$40
$20 20%
$0 0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012
Buyout (excluding add-ons) Growth Commercial products Commercial services Transportation Other
Source: PitchBook Source: PitchBook
The strong increase in deal volume in the commercial products billion secondary buyout of Vivint, played a large role in increasing
sector in recent years has translated to a growing share of B2B the median B2B buyout size 27 percent from 2011 to 2012.
capital invested as well, as the sector has increased from 29
percent in 2010 to 50 percent in 2012. However, commercial The uptick in median buyout sizes may also be a reflection
services was the only B2B sector to see capital invested increase of the premium that investors have been willing to pay for
from 2011 to 2012. top performing companies with the relative lack of quality
opportunities in recent quarters. Redman has seen PE firms
The rush to close deals before the end of the year was particularly paying higher multiples for quality businesses, including
evident when looking at larger transactions, as the seven biggest additional auction processes and competitive bidding. As
B2B deals of 2012 all closed in Q4. This rash of mega-sized deals, Marcotte put it, “It’s a seller’s market if you have a quality
like the $3.46 billion carveout of Neodyne Industries and the $2 company.”
www.mcgladrey.com [3] www.pitchbook.com
5. Business Products and Services
Add-on deals in the B2B industry
Add-on deals as a percentage of buyouts
300 60%
250 50%
200 40%
150 30%
100 20%
50 10%
0 0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2006 2007 2008 2009 2010 2011 2012
Add-on Non add-on Add-on % of buyout
Source: PitchBook
As we touched on earlier, there was a high number of platform grab the attractive platforms when they were available, and I see
acquisitions in Q4, which played a role in driving the percentage a reset and refocus on the add-ons now.”
of add-on deals down to 42 percent, which is the lowest level
since Q3 2011. Now that many investors have completed [4]
Over the last couple of years, add-ons have been one of
their platform acquisitions, however, there is expected to be the primary ways that PE firms have looked to enhance the
heightened add-on activity in the year ahead. operational side of their portfolio companies. One of the key
things for PE firms moving forward will be how they integrate
“Our clients have already told us that they expect to be very their add-on acquisitions into their platform companies,
active for add-ons in 2013,” Marcotte says. “I think firms tried to especially when preparing for exit, according to Gaines.
Select B2B Q4 2012 transactions
Company name Investor Sector Amount ($M)
Neodyne Industries The Carlyle Group Commercial products $3,460
BC Partners
Vivint The Blackstone Group Commercial services $2,000
Veolia Environmental Highstar Capital Commercial services $1,909
Services Solid Waste
Wilsonart Int’l Holding Clayton, Dubilier & Rice Commercial products $1,050
FleetPride TPG Capital Commercial products $1,000
SGS International Onex Partners Commercial services $813
GCA Services Group The Blackstone Group Commercial services $715
Centerplate Olympus Partners Commercial services $551
CoHo Distributing Meritage Group Commercial products $500
Sequa Automotive Group The Jordan Company Commercial products $400
NES Global Talent AEA Investors Commercial services $376
Source: PitchBook
www.mcgladrey.com [4] www.pitchbook.com
6. Business Products and Services
Exit activity in the B2B industry
B2B private equity exits (count) by exit type
70
60
50
40
30
20
10
0
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
Source: PitchBook
The major story in B2B exits in 2012—and over the last few and PE firms have a need to realize aging investments. “As you
years—has been the increasing number of secondary buyouts. see positive year-over-year results, it should be beneficial for
B2B exit activity has increased three consecutive years now, exit activity,” says Redman. “Many of the entities I look at from
and virtually all of that growth can be attributed to secondary a commercial services standpoint may not be back to ‘06 and
buyouts, which spiked 506 percent from 2009 to 2012. “It seems ‘07 levels, but they’re certainly trending to hopefully be there
like we’re involved in more and more secondary buyouts, and within a few fiscal years.”
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, While the fiscal cliff issue has not been fully resolved, it
it’s a pretty good company. There is a lot of PE capital on the appears that investors are becoming accustomed to the high
sidelines and [PE-backed businesses] are the good companies levels of uncertainty. “There is some uncertainty in the overall
in the marketplace, so PE firms are buying them.” marketplace and concern about the midterm economic
outlook, so this is as good a time as any to be positioning and
Exit activity should only continue to accelerate in 2013 and selling companies,” explains Marcotte.
beyond as the performance of B2B companies steadily improves
B2B private equity exits (count) by exit type B2B private equity exits in Q4 2012 by sector
250
200
Commercial
services
150
45%
100
50 Commercial
products
52%
0 Transportation
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 3%
Corporate acquisition IPO Secondary buyout Source: PitchBook
Source: PitchBook
www.mcgladrey.com [5] www.pitchbook.com
7. Business Products and Services
The following list shows a detailed breakdown of the PitchBook industry codes for the business products and services industry.
Business Products and Services (B2B)
1.1 Commercial products 1.3 Transportation
1.1.1 Aerospace and defense 1.3.1 Air
1.1.2 Building products 1.3.2 Marine
1.1.3 Distributors and wholesale 1.3.3 Rail
1.1.4 Electrical equipment 1.3.4 Road
1.1.5 Industrial supplies and parts 1.3.5 Infrastructure
1.1.6 Machinery 1.3.6 Other transportation
1.1.7 Other commercial products 1.4 Other business products and services
1.2 Commercial services 1.4.1 Buildings and property
1.2.1 Accounting, audit and tax services 1.4.2 Conglomerates
1.2.2 BPO and outsource services 1.4.3 Government
1.2.3 Construction and engineering 1.4.4 Other business products and services
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
[6]
1.2.12 Printing services
1.2.13 Security services
1.2.14 Other commercial services
www.mcgladrey.com [6] www.pitchbook.com
![Business Products and Services
McGladrey announces the 2012 Year in Review
Private Equity Deal Flow Profile
Heading 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. Lipari Mark Gaines
National Executive Director, Private Equity Services Partner, Business Products and Services Practice
McGladrey LLP McGladrey LLP
212.372.1235 312.634.4515
don.lipari@mcgladrey.com mark.gaines@mcgladrey.com
Milton Marcotte Benjamin Redman
Practice Leader, Transaction Advisory Services Director, Transaction Advisory Services
McGladrey LLP McGladrey LLP
312.634.3143 212.372.1868
milton.marcotte@mcgladrey.com benjamin.redman@mcgladrey.com
www.mcgladrey.com [1] www.pitchbook.com](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)