Quest for returns boosts private equity: leveraged buyouts and other deals led by private equity firms are all the rage these days. Insipid stock market returns have brought institutional funds flocking to private equity, which is now able to buy very large, complex companies.

• Author: Sweeney, Paul
• Position: Financing

A decade ago, James Butter-field says, he cruised America's countryside searching out companies that would make good candidates for private equity deals.

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"I used to fly into different cities and drive around industrial parks with a tape recorder next to me," he recalls. "I'd speak the names of companies [into the tape recorder] and then look up the companies to see what they did. I'd cold-call them and ask them, 'Have you thought about joining up with a partner for growth?'"

That system worked well enough for him to recruit Southern Litho-plate, a family-owned company in Wake Forest, N.C., that makes lithographic plates used by community newspapers for offset printing. "It turned out that the owner was getting up in age," Butterfield says, recalling that the owner's wife prodded her husband to accept the deal, saying: "'Please, honey, let's take some money off the table and let our sons run the business.'"

Nowadays, Butterfield is still searching for good takeover candidates, but he seldom goes cruising. As regional director of deal sourcing and origination at the Riverside Co., an Atlanta-based private equity firm, he must abide by the current rules of engagement. And as private equity deals ("private equity" is the preferred term for investment firms that used to be generally known as "leveraged buyout" and "management buyout" shops) have become both better understood and more mainstream, more companies are being sold through an agent in a carefully calibrated auction system.

So while there are more good prospects than ever, say private equity firms, the buyouts are more expensive and, frequently, harder to accomplish. "You used to be able to go to Dubuque and make contact with the locals there, and you'd have a chance to see a deal," says David Lobel, a managing partner and cofounder of Sentinel Capital Partners in New York, a private equity firm that invests mainly in middle-market companies.

"But, now, the regional mergers-and-acquisitions boutiques have the country covered," he adds. "There are probably 30 firms that you can call and establish a relationship with over the Internet and the telephone. That's how you get the deal flow."

Among the best known regional boutiques that specialize in shopping companies to private equity firms are Harris Williams in Richmond; George K. Baum in Kansas City; Goldsmith Agio Helms in Minneapolis; Edgeview Partners in Charlotte; Lincoln Partners in Chicago and GulfStar Group in Houston. "There's a lot more sophistication in the market than there was only five years ago," says Colt Luedde, managing director of GulfStar. "I wish there wasn't as much competition [for deals], but from the valuation perspective of the...