What PE firms look for in private companies.

• Author: Marshall, Jeffrey
• Position: Private equity firms looking for investments

In their screening of private company investments, private equity firms want a lot: national companies that are market leaders with strong management, high barriers to entry, growth opportunities and attractive margins. Oh, and recurring sales, a minimum of seasonal cyclicality and low capital expenditure needs, to boot.

These and other criteria were reviewed at FEI's "Emerging Strategies for Private Companies" forum in October in St. Louis by Scott Gilbertson, a regional director with The Riverside Co., a private equity group. Gilbertson discussed both his own company's investment philosophy and that of the general PE marketplace.

Most private equity firms, he reminded the audience, are looking to hold portfolio companies for three to seven years, with an average of five years. Current targets include an internal rate of return of 20 percent, he said--down considerably from the 30-35 percent of six or seven years ago. Seventy percent leverage is standard, he added, with 60 percent senior debt and 10 percent mezzanine financing.

While the summer credit crunch hasn't hit the middle market the same way it has hit the megadeal arena, debt clearly has become more expensive, and quality deals are getting done at higher prices, he said--and there is little or no market for companies with earnings before...