Are All PE Firms Barbarians?

Over the past 4 years there have been 116 acquisitions in the electrical distribution industry as well as a number of manufacturers, and manufacturer reps / lighting agents, that have been acquired.

On the distribution side, most acquisitions have been made by strategic buyers, leaving only a few to private equity (PE) firms (and a couple of them were diversified distributors – Wiseway and Republic Companies).

On the manufacturer side it has been mostly strategic deals but there are some companies that are quietly owned by PE firms, and inevitably there are PE firms looking at every manufacturer deal. The most recent, major, PE acquisition of a manufacturer was NSI. Another is rumored to be completed and awaiting industry announcement.

While private equity firms have a certain, shall we say, “reputation”, over time I’ve learned that there are different types of PE firms with differing objectives. While they all want to buy and eventually sell, not all are quick buy, “strip” or invest” and seeking a quick sale. There are more, shall we say, “strategic” PE acquirers … and some are what is called “family offices.”.

At the recent HARDI meeting, Quinn Carlson from Uplift Partners gave a presentation on the M&A market that was very well received. He has much experience in the distribution space and shares that PE firms could be a viable alternative for distributors who are seeking an exit strategy or an investor to help them take their business to the next level (which is what happened prior to OneSource being sold to Sonepar, when Electric Supply (of Tampa) was sold to Supply Chain Equity Partners before growing and then being sold to World Electric (Sonepar), and is happening with Wiseway and Republic.) . In these cases, consider it “using other people’s money” (or OPM).

Quinn has had experience with a number of private equity firms. He shared his thoughts in this article below on private equity acquirers.

The PE Opportunity

“When I was in business school, I had several professors tell me that I really ought to read Barbarians at the Gate (Bryan Burrough and John Helyar, 1989) to understand private equity. For those who haven’t read the book, the book describes a world in the late 1980s when so-called private equity investors (the “Barbarians”) began pooling together large sums of capital from banks, bond investors and from other equity investors (“a.k.a. “other people’s money”) to then pursue takeover or buyout transactions in what is now known as a leveraged buyout (“LBO”).

Once the LBO transaction was completed and the private equity firms assumed ownership and control, they would then hope that the newly acquired business would be able to pay down debt from future cash flows and/or they would also look to restructure / monetize parts of the business. If they were right, this investment would produce a handsome return for their investors and, of course, themselves.

The LBO concept exploded literally and figuratively. Some of these transactions played out in the public domain, such as the leveraged buyout of RJR Nabisco in 1989 and its subsequent “fall”, which is the main story in this book. But this book was not just entertaining; this book planted two seeds in the capital markets that have long shaped how business owners think about private equity. And business owners would be wise to reflect on how this market has evolved from its origins.

On the one hand, this book generated an almost deity-like reverence to the private equity titans behind the LBO and this newfound way to investment returns. Professionals, young and old, were drawn to making money in this way, and even more capital flowed, which led to even more people getting involved in exploiting these opportunities. Studying finance drew more students, further adding awareness and reverence to the private equity barbarians. With even more success – whether formed from pure luck or true investment savvy didn’t really matter, more people began exploring, experimenting, and, yes, innovating ways to take this concept across a wider array of opportunities. Today, nearly $1 trillion in equity capital is now flourishing on the sidelines awaiting to be deployed in private company transactions.

The second seed that was planted was the perception, which still exists today, that such private equity investors are nothing more than the barbarians that were personified in this book.

I routinely hear how business owners are very skeptical of private equity firms today and fear how their business and their legacy will be tarnished if they were to complete a transaction with such firms.

This perception is wildly mistaken and can lead to significant missed opportunities for business owners who are contemplating an exit strategy in the coming years. (Note: there are certainly many private equity firms that are still barbarians to their very core. Business owners would be well-advised to steer clear of these animals.)

However, as an M&A advisor to many family-owned and other closely-held businesses that were each seeking a great exit transaction, I have seen more and more private equity firms step up in our processes and give our clients very attractive and premium terms. With the vast expansion of capital available now, private equity firms have evolved themselves and are now drawing clearer lines of competitive distinction not only relative to strategic buyers but also relative to each other.

This competitive evolution is good news for business owners because it means they now have a) more exit options than they ever had previously, and b) to the extent such an exit transaction process is managed well, the competitive tension from the private equity market will drive stronger valuations. It is increasingly common for private equity firms to put forth more competitive proposals than even highly strategic acquirors. And not all PE firms operate the same. There are many that respect the legacy, involve prior ownership (if owners desire), embrace key management, and even some that are more “buy and hold.” Not every PE firm is seeking “a quick flip.”

The real opportunity here for business owners is not just to create a bigger sale price from this expanding capital base. Rather, what this market evolution has unlocked for business owners is a new opportunity to align their personal goals in partnership with a private equity firms who shares the vision on the growth prospects of a business and the means and experience to turn that vision into reality.

Many private equity firms are exceptionally good at growing companies through subsequent (“add-on”) acquisitions and allowing business owners to ride along beside them as equity partners as the platform enterprise appreciates. Often referred to as the “second bite” of the proverbial apple for business owners, this type of transaction is more difficult for strategic acquirors to pull off well as they typically will prefer owning 100% of an acquired business. Private equity firms, on the other hand, have become truly excellent in crafting this transaction for business owners and frequently leads to more interest and valuation from these firms in the process. Such a transaction, as long as it is done with a strong, growth-oriented private equity firm, allows business owners to participate in not just one liquidity event, but two and perhaps several more.

This can change the game as it relates to how business owners can now think about an exit. It is no longer a choice between a strategic acquiror and a barbarian. And the option does not have to be “sell and walkaway” shortly thereafter. They could still sell and walk away but the point here is they have way more private equity options now should they want to remain either invested operationally or financially for years to come. With many of our past clients, these once-skeptical business owners were not just happy they did a deal with private equity, but they are even prouder of the heights their legacies have stood as a result.

The Electrical distribution industry is a vertical that we expect will draw a significant amount of interest from private equity firms. The Electrical distribution industry has many natural strengths that attract a wide variety of investors, including the aging electrical grid, the long-term and steady increase in electrical products and services in our interconnected way of life, a relatively fragmented industry, a strong recurring demand and a history of innovation. Rexel, Sonepar, Wesco, Graybar and CED have long dominated as the buyers of family-owned and closely-held electrical distributors. Private equity firms are indeed standing outside the gates of this industry, but we expect they will be significantly more active in this vertical in the years to come.

It will always be important to keep the barbarians well outside your gate. Now more than ever, you’ll be well advised to have an experienced hand guiding you down this path. The greater number of options out there to transact can only uplift your exit strategy if you can effectively compare and contrast the options. With an asset class of approximately $1 trillion today, it is now time to take a closer look at whether any of these descendants from barbarians might help build you a better gate and maybe even a larger estate.

Quinn Carlson is a Managing Director at Uplift Partners, an M&A advisory firm based in Chicago. He has worked extensively with family-owned and entrepreneur-owned distribution businesses across the trade industries for more than a decade. Prior to founding Uplift Partners, Quinn was a senior member of the investment banking departments at Deutsche Bank Securities in New York and Duff & Phelps in Chicago. Quinn began his career at Ernst & Young. Quinn can reached at 312-543-1815 or via email at quinn@upliftpartners.com.

Takeaways

While private equity has not been too successful in winning many distributor deals, some noteworthy ones are:

• When a PE firm owned 49% of One Source before it was sold to Sonepar
• Electric Supply of Tampa being sold to Supply Chain Equity Partners, who grew the business and sold it to Sonepar.
• CID Capital invested in Wiseway
• Republic Companies has a PE firm investor (and they just expanded via a “merger” to increase their footprint)
• Wesco, before it went public, had been owned by CD&R

And while the EW Top 100 gets winnowed down (11 purchased in 2024), and hence there are less “larger” distributors, the ones that remain could be acquired by PE firms (as evidenced by QXO’s attempt at Rexel even though QXO is not a PE firm), PE firms are used to investing in business plans (hence the need to have vision) and pulling together more complex deals (because they have the financial and legal expertise.) There are conceptual models that could enable “small to mid-sized distributors”, with the “right” vision and talent to become the next “large / growth” distributor in the country.

“Vision” does not have to be limited to your existing business model (business focus or geography.)

A PE firm could help an owner / company:

• Exit the business
• Facilitate the old concept of a management lead buyout as the PE firm could partner with the next level of talent within a business.
• Help a second generation buy-out a first generation
• Acquire a portion of the business and bring funding to enable a company to grow multiple levels
• Fund a business plan

A wise manufacturer once said that he’d accept a lower share of the market in exchange for the market growing 2x. As a business owner, if someone can help you 2x your company (or more), and give you cash for a percentage of the business while you can also benefit from the growth, that is not necessarily a bad deal. A distributor once described this to me as “taking two bites of the apple.”

And then again, for the right deal they may pay more than a strategic acquirer.

Exploring options is not a bad alternative. Saying yes to the first offer may be easy but may not be beneficial (or lucrative.)