By Damon Houterman
Baker Tilly
In today’s challenging economy, private equity firms are struggling to find qualified talent with experience in managing not only finance and accounting but also operations. This historic problem has only worsened in recent years, with many professionals retiring and fewer people graduating with accounting degrees. Also, many individuals left the financial profession during the pandemic to pursue other aspirations. It’s created a void that firms are striving to fill.
This topic served as the backbone of a recent Q&A with Baker Tilly industry leader Damon Houterman as he examined the state of private equity in 2024.
Which 2023 PE trends do you anticipate will make the most impact in 2024?
Rising interest rates have been one of the biggest factors influencing PE deals, and we expect the current high-interest environment to continue for an extended period.
As a result, we’re seeing more structure around a deal, with more earnouts and seller notes. Sellers have been rolling more equity into a deal structure, which has tended to have less debt than in previous years, and buyers are thus more likely to retrade deals.
Before, PE firms focused less on earnings and more on working capital and debt items, as those two areas had a greater impact on the net purchase price. Earnings were important, but buyers wouldn’t necessarily retrade based on a discrepancy that turned up in due diligence. That isn’t the case anymore. Consequently, sellers are more likely to adopt sell-side preparation to preserve value.
A more recent development involves entrepreneurs and family-owned businesses.
Typically, when interest rates start to climb, these types of businesses wait for the market to turn in their favor, so the bid-ask spread on deals can be fairly wide, based on the expectation that the spread would decrease with changing interest rates. Since the end of Q3, we’ve seen capitulation from private and family-owned sellers. The bid-ask…
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