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2018 Top 202: The Private-Equity Effect

Low valuations and interest rates open the door to retail investing

CHICAGO -- The stock market isn’t the only thread weaving itself through the M&A landscape for convenience stores; private-equity firms are also smelling money in the c-store space.

With the entry of more private-equity dollars into c-stores, the belief is that these investors will run off a more traditional, customer-focused playbook—albeit with a potentially tighter time frame than privately held companies. Kenneth Marks, founder and managing partner of High Rock Partners, Raleigh, N.C., concurs, saying that private-equity firms at their core must focus on scaling the business.

He describes the model this way: Private-equity firms make money by purchasing an asset at one level of EBITDA (earnings before interest, taxes, depreciation and amortization), growing the company by whatever magic sauce they’ve mastered and selling when the level of earnings is considerably higher. In other words, say a company makes $10 million a year in EBITDA.

If a private-equity group buys it at a multiple of 5x and makes investments in management, resources and additional assets to grow EBITDA to $50 million, it could make its return by selling that company for a higher multiple, say 8x.

“You can push for efficiencies and other cost-saving measures, but that only helps you take $10 million of EBITDA to 11 or 12,” Marks says. “You can’t make it $50 million. To do that, you have to grow the company.”

The reason private equity in general is growing is because, as a whole, funding is increasing. Returns on typical stocks and bonds have decreased over time, Marks says, with the stock market today returning about 10% over the long term. Add bonds at about a 4% to 5% return (considering a typical investment has a 60% to 40% mix of stocks and bonds), and the combined return is about 6% to 7%.

Private equity is higher risk but yields higher returns, somewhere in the range of 12% to 15%, Marks says.

The reason private equity in general is growing is because, as a whole, funding is increasing.

Also, private equity as a vehicle for investors is growing. Ever since the 2008 recession, low interest rates and the lingering undervaluation of publicly traded stocks has created a vacuum of sorts. From 1996 to 2016, public listings dropped 50%, according to MSNBC. In the meantime, the ability of private equity to raise capital on equal or better terms compared to the public market has also increased, the news agency reported.

Several private-equity-backed c-store chains are working their way up CSP’s Top 202 rankings, most notably West Des Moines, Iowa-based Yesway, with its suburban-rural approach to building scale. Others in the race include Richmond, Va.-based GPM Investments, which closed on its most recent purchase of E-Z Mart, Texarkana, Texas, this past spring. Then there’s Long Beach, Calif.-based United Pacific (store pictured above), which appears to have slowed its M&A pace in 2017.

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