Know PE’s situation

Another important factor in negotiations is knowing what the situation is like on the other side of the table. It helps make it easier to discern your position and whether different tactics will be effective. BDO’s annual PE Equity Survey provides good insight into the current situation for PE firms, which can stand you in good stead during negotiations. Amongst its findings are: 

• Healthy competition: The market for PE firms is very competitive – and becoming more so. 32% of international fund managers responding to the survey point to increased competition from private equity peers.
• Dry powder: PE firms currently have access to a lot of capital to spend on new deals. A robust fundraising environment and easy access to leveraged loans with relatively loose covenants is a driving force for increased competition. 
• High valuations: Available capital and competition are driving up valuations for software companies, which are considered attractive deal targets. To use European M&A as an example, buyout firms paid an average of 11.6 times EBITDA for targets in the first half of 2017, up from an average of 10 times EBITDA seen the previous year. Both are higher than the 5-year average EBITDA. 
• Strong investment appetite: Although rising valuations and deal multiples would often make PE firms more reticent towards new investment, the favourable investment environment and access to capital seem to outweigh those concerns. 79% of respondents in the PE Equity Survey said that they were already directing most of their capital toward new deals. About 82% said that they were planning to make between one and four new platform deals in the next 12 months.
• Longer investment periods: PE firms’ rule of thumb of keeping an acquired company on the books for between three and five years seems to be eroding. PE firms are generally favouring extending investment periods. 58% of international respondents to the BDO PE Equity Survey said that they expected investment periods to increase.

In short, PE firms see increased competition for attractive acquisition targets, which has driven up valuations. While this would often lead them to wait with making further investments, the readily available capital and beneficial market conditions seem to outweigh valuation concerns. Simultaneously, PE firms are generally looking to grow their acquisitions for longer periods before potentially selling them on, leading to longer periods of collaboration.

While difficult to generalise, the current investment environment means that software companies currently have a strong negotiation position – if they know how to employ the right strategies to leverage it.