$1.6 TRN Of Dry Powder Desperately Seeking Healthy Companies

$1.6 TRN Of Dry Powder Desperately Seeking Healthy Companies

Private Equity Firms have amassed a $1.6 Trillion (yes, you read that right -Trillion) war chest of what they call ‘dry powder’. Dry Powder is a fancy term for committed investable cash. There is a mistaken perception that Private Equity will be using this capital to bail out companies that need life lines to help weather the economic storm caused by Covid 19. This perception could not be more wrong. Pension funds, Endowments, Insurance companies, and the primary investors in Private Equity absolutely have not made commitments to prop up struggling old investments. Instead, they want their capital to be used to buy and grow healthy new investments. This in turn spells massive opportunity for healthy sellers whose business has not been severely impacted by Covid 19.

Experience has shown that funds invested in a downturn can be quite profitable. Private Equity funds invested in 2007-2009 have generally produced 18% returns.

“Does that mean Private Equity has $1.6 Trillion burning a hole in their pockets? Yes! The last thing Private Equity firms wish to do is to return this committed capital, which represents up to $32 Billion in fees for Private Equity, to their investors.”

We’ve just brought two large title agencies to market and, in both cases, the level of interest by Private Equity firms was astonishing.  Valuations have been equally strong (with so many title agencies busting at the seams with business and experiencing record transaction volumes).

While we can’t tell the future, in terms of next waves or upturns, downtowns or when a vaccine will come (not fast enough!), we do know with absolute certainty that a trillion plus dollars is out there looking for a home.

Is this a good time to sell? I suggest there might not be a better time to sell your company.

I have always wanted to have a crystal ball as well as a rewind button. (I’ve also been asking IT to perfect the cloning device so I can be in two places at once). Wishful thinking doesn’t seem to be working! Everyone wants to know what the future holds. That’s why economic (and weather) forecasts are always so popular. Maybe it’s just me, but isn’t the one thing we can all rely upon in terms of forecasts is that they are pretty much always wrong? Financial forecasts are consistent only in their inherent unreliability. And -when one of them proves to be correct in hindsight, that forecaster is deemed a genius or savant when all I think happened is that they guessed right. How does one plan a title business’ future based on projections that have so many variables?

We don’t know precisely what the market will be like in a year or two or three, or what economic or administration changes may occur. The general belief is that we will enjoy a strong refi market for the next 12-18 months. Some believe we will have  a healthy default market soon. Everyone seems to be thinking there will be  a reasonable buy/sell market for the remainder of this year. Then what?

Sometimes, wisdom emerges from basic things little kids say. Recently, I was trying to help my 8 year old daughter with her third grade algebra. Sensing my despair, she took my hand, looked at me lovingly and said, ‘Papa -you’re overthinking again. Just start with what you know to be true!’

Good point.

We know that NOW is a strong market for Title. We also know Private Equity is sitting on historic levels of cash which they must put to work or return (and forfeit billions in fees!!) Buying and selling title companies is what we do for a living. For that reason, we have firsthand knowledge/experience of which Private Equity firms are interested in title right now.

In addition to Private Equity, we are also seeing that strong and well-run agencies are highly coveted by Strategic Buyers. In the realm of Strategic Buyers, we also know firsthand which multi-state agencies want to expand by acquiring other regional players. We are only seeing this consolidation trend in the title industry accelerating.

The future is uncertain.  One of the things we are fond of hearing from our title agency seller clients after successfully closing with their choice of our many hungry buyers, is that the cash in their bank account provides them and their family with the ever-elusive comfort and certainty we all seek.

Sounds like a perfect time to be a seller.

-Howard Turk


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