Considerable focus has been given to the role of private equity in the green industry. Its impact may be somewhat over-emphasized, but with several industry leaders controlled by private equity and other private equity-backed initiatives either underway or in the planning stages, it is worth considering what private equity is all about.
In general, in order to attract private equity investors as a platform or initial investment, a business would need to have revenues of approximately $20 million or more with good growth prospects in both revenue and earnings (EBITDA). This would mean roughly the top half of Lawn and Landscape’s Top 150 might qualify in terms of size. Far fewer firms would make the cut in terms of current earnings and revenue and earnings growth outlook.
However, many private equity firm investment strategies include an element of growth through acquisitions of either tuck-in or standalone units. The universe of green industry firms that may make sense to private equity investors on this basis (as opposed to an initial platform acquisition) is much larger.
We are seeing valuations in the industry come down somewhat, partially due to a more disciplined investment approach and partially because, private equity transactions are almost always leveraged, with 50% to 80% of capitalization provided through senior debt or mezzanine financing. Because access to debt financing and its cost are expected to rise, private equity valuations will have to come down to produce the minimum projected rates of return required by the private equity investors.
One factor that is difficult to predict is competition. We have had relatively little competition in recent years for green industry transactions. There is some expectation that new investors will emerge which will have the effect of increasing competition and, to some extent, mitigating the downward pressure on valuation.
And it is important to remember that there is almost always competition for the best quality deals.