The landscape in all investment classes is certainly changing due to the current global economic reality, so perhaps it is not a surprise that private equity firms are being pressured from unlikely sources. According to a report in the Canadian national newspaper The Globe and Mail, private equity firms are feeling that their investment opportunities are being squeezed more and more by stronger firms within target industries, who are now acquiring undervalued competitors.
Difficulty of acquiring market share is driving strategic purchases
Companies are increasingly finding it difficult to grow their market shares through traditional means due to difficult economic conditions in most developed markets worldwide. Instead of investing in marketing or product development, many companies are finding it more effective to purchase undervalued peers in order to access additional market share and add related product lines. The competition in acquiring undervalued companies is making acquisitions more difficult for private equity firms, especially when the competition can benefit from synergies and may be motivated by more than just return on investment potential.
Strategic Buyers may be willing to pay more than what can be justified by private equity firms
Private equity firms acquire undervalued companies with the intention of achieving certain return on investment hurdles when they restructure and sell the company in the future. When a strategic buyer within the same industry is examining a firm for acquisition, return on investment hurdles can also include operational synergies, the value of new technology to their existing product lines or the elimination of competition within the industry. These factors encourage strategic buyers to sometimes pay a premium in excess of what a private equity firm could afford within their required return hurdles.
What this means for job seekers
While this may sound like negative news for those interested in working in private equity, it may actually mean that private equity firms will need to add resources in order to be faster to react to potential deals in industries that are under such pressures. The other side of the equation is of course that many corporations may be looking for individuals with private equity experience in order to evaluate potential acquisitions. Such corporate finance activities may not be common occurrences for many companies, and existing internal resources may be limited. As with many occupations, being flexible and willing to adapt to such changes in market dynamics will be critical to success in the uncertain economic times we face today.
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