September is here, and with the rush to baseball playoffs, Yogi Berra’s aforementioned quote comes to mind in thinking about the current state of private equity—high prices, surplus of dry powder ($906 billion of dry powder as of the second quarter ), plentiful debt, and shortage of executive level talent.

The chart below from Pitchbook’s Q2 2017 US PE Middle Market Report says it all:

Some of the more nuanced consequences that we see in the world of surplus capital and shortage of companies and talent worthy of acquisition are noted below:

Deal Sourcing: The efficacy of M&A conferences as a strong source of deal flow appears to be fading. We hear from private equity funds that any “relationship” with banks is being trumped by the auction process, and private equity professionals are altering their allocation of time and money and focusing on alternative origination sources, such as direct-to-companies and referrals from mid-tier accounting, tax, and consulting firms.

Portfolio Company Leadership: Business models are significantly impacted by technology innovation, changes in buyer behavior, and increased global competition. The lack of cross-functional leaders and “A” player talent able to execute in this context has led to key roles vacant for extended periods or filled with interim solutions.

Information Systems: We are seeing an increase in botched system installations due to poor leadership, failure to adequately address the need for system flexibility over time, and investors’ unrealistic budgets and timelines.

Extended Hold Periods: The adage, “good starts lead to good finishes,” is as true as ever. Investments that show signs of early distress or where private equity funds are hesitant to make personnel or business model moves result in a longer and more complicated road to sustained profitability compared with 10 years ago. In today’s business environment, mistakes don’t go unpunished, especially those unsolved for an extended period.

Proliferation of New Funds: Nevertheless, we see new fund announcements every week: Buyout funds launching “growth funds,” larger funds going down market, managing directors spinning out from well-known funds to start their own, family offices going direct, pledge funds forming…

The world of middle market investing continues to have its challenges, but as we channel our inner Berra remember that private equity is "90 percent mental and the other half is physical," so keep on keeping on because "it ain't over till it's over!"

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