Acquisition-minded investors eye Indiana companies

Indiana is starting to benefit from a push among private equity firms across the country to deploy capital raised in boom years before the money reaches its expiration date.

Investment bankers, corporate attorneys and private equity fund managers say they’ve seen an uptick in interest among outside firms hunting for Indiana companies to buy.

David Millard, who leads the corporate department at Indianapolis-based law firm Barnes & Thornburg LLP, said that in the last 18 months he’s gotten about 100 calls from private equity firms and individual investors inquiring about prospective Indiana purchases. That’s four times the 25 or so he receives in a typical 18-month period.

And they’re calling, Millard said, from a broader swath of geographic locations.

Other experts also report anecdotal evidence indicating outside interest has ratcheted up.

Tony Schneider, senior vice president in the Indianapolis office of Missouri-based BKD Corporate Finance, said in December alone he had personal visits from private equity groups from Buffalo, N.Y.; Philadelphia; and Charlotte, N.C.

“We’re going to see that kind of flow through here,” Schneider said. “A lot of those firms haven’t necessarily had investments here, but they clearly view this as a place where there would be good investment opportunities.”

The most significant factor behind the uptick in interest, experts say, is a hunger for deals among private equity firms nationally. It’s triggered by looming deadlines to deploy hundreds of billions in capital raised in the mid-2000s that was largely unspent over the last few recession years.

That urgency has created a competitive landscape to snatch companies in more traditional private equity hotbeds, such as the coasts, and inspired firms to broaden the geographic scope of their search.

“There is a lot of capital looking for deals,” said Glenn Scolnik, chairman at Indianapolis-based private equity firm Hammond Kennedy Whitney & Co. Inc. “[Firms] are looking in places they might not normally look.”

Certain dynamics in the Indiana landscape also have contributed to putting the state’s companies on investors’ radar screens.

Its manufacturing base and evolution into industries such as health care and technology, coupled with a fiscal climate outsiders perceive as stable, have increased the state’s appeal, some say.

“We’ve seen more investors asking us what’s going on with the market here in Indiana,” said Christopher Day, managing principal in the Indianapolis office of investment banking firm Navidar Group, which works with health care and information technology companies. “The business environment has changed a lot in the last 10 to 15 years. It’s kind of the new frontier for technology- and health-care-related companies.”

Better times for M&A

The M&A market has seen a comeback from the recession over the last two years.

Nationwide, activity was up 14.4 percent last year over 2010, according to New York-based Mergermarket.

In Indiana, activity also was up, with 85 deals in which Indiana companies were purchasers or targets, according to Mergermarket. That’s compared with 69 deals in 2010.

Private equity transactions in Indiana also have made a comeback, ticking up to 32 in both 2010 and 2011 after dropping to 21 in 2009, according to PitchBook, a Seattle-based private equity research firm. But Day said those figures might not yet reflect the increased interest in Indiana companies, as some deals remain in the pipeline.

Whether M&A activity remains strong in 2012 is likely to depend upon factors such as the resolution of the European debt crisis, but some say it appears to be the beginning of a four- to seven-year positive cycle.

“That strong M&A market we saw beginning in September has gone straight up in the last five months,” Millard said. “We’re really pushing the edge of human endurance to keep up with it—and there’s no end in sight.”

Strategic corporate buyers are helping fuel the surge, due in part to strong pressure on behalf of shareholders to deploy sizable piles of cash.

But the pressure among private equity firms to invest is more intense and immediate.

Firms typically are given five to six years to spend the funds invested by limited partners. If they don’t spend it, they have to return it.

A number of firms raised lots of capital in 2007, when the economy was bustling, and are nearing their deadlines to spend it.

Meanwhile, competition for quality companies has increased. Scolnik said his firm “came in second quite a bit” in 2011 because pricing competition was steep. Multiples have increased from about four to five times a company’s cash flow to five or six times, a near return to pre-recession levels.

“A lot of deals came across our desk in the second half of the year and went for big multiples,” Scolnik said. “People are paying big dollars for quality companies.”

New strategies

The competition has led private equity firms to employ new techniques. Matt Hook, a managing director at Indianapolis-based private investment firm Centerfield Capital Partners, said instead of waiting for companies to advertise that they’re on the market, firms are hunting for potential companies that aren’t yet for sale.

“People are seeing a lot more inquiries that are just out of the blue,” Hook said. “

Larger private equity firms also are more willing to look “down market” to smaller-value deals. Scolnik said funds with $500 million to $750 million increasingly are pursuing companies with cash flow in the $10 million to $15 million range, which commonly would be targets of funds half that size.

Those dynamics work to the advantage of Indiana, which has a plethora of smaller-market companies.

The state also abounds in companies that many investors seek today, Millard said.

“They’re not looking for the high-risk, high-tech, gizmo type of businesses that might be prevalent on the coasts,” Millard said. “Many of those quiet businesses outside the Indianapolis beltway—in Madison, Evansville, Princeton—that earned us the name Rust Belt, that’s what they’re looking for.”

According to PitchBook, 18 of the 32 private equity deals in Indiana last year were in the business products and services sector, with other areas such as health care and information technology contributing to the number of deals.

Indiana also has made strategic efforts to attract the attention of private equity investors. On the more dramatic end, that includes diversifying the state’s economy. But subtler efforts, such as establishing a chapter of the Association for Corporate Growth about six years ago, also have helped increase the state’s exposure.

“Now there are a lot of private equity groups that come to some of the major events that we have,” Schneider said.

As the interest materializes into more Indiana acquisitions, experts say the impact will mostly be positive. When firms buy companies—particularly as platform companies—they typically invest in them, improving facilities and adding jobs.

But there is some concern about ownership—and therefore wealth—moving to out-of-state entities. And while Indiana has grown its number of private equity firms to 13, according to the Private Equity Growth Capital Council, there’s a need for more to ensure Indiana-based firms participate more in such transactions.

That’s why it’s important for company owners who benefit from the sales to reinvest the wealth so other companies in the state benefit.

“It generates wealth locally when a transaction happens,” Day said. “It’s the next transaction; capital has to turn over and turn over. That’s good for society.”•