I get at least one contact a week from a private equity firm that wants to invest in the pet industry.  As politely as I can, I tell them to line up behind the other 50+ firms I have on my list that would like to invest in pet.  As owners of manufacturing companies, you probably get many of these calls as well.  So I decided to delve into the question of “why is private equity so interested in pet, and what type of companies would be an ideal acquisition for these groups? “

Over the past several years, pet industry analysts have witnessed an increase in mergers and acquisitions and a significant inflow of capital into pet businesses across the country. The action the pet industry has seen is primarily attributable to institutional capital’s demand for recession-resilient companies and innovative operators. Since the demographics in the pet industry are such that customers continue to own pets even in recessions, and operators typically find creative solutions to address under served markets, demand has been piqued in the pet industry.

Conversely, multiples in the industry have been on the high end relative to manufacturing and distribution counterparts in other industries because demand for these companies exceeds supply of pet companies that meet private equity’s criteria. As a general rule, for companies to be PE-ready, they have to have or be close to $1 million to $2 million of EBITDA, which basically translates into a company doing at least $15 million in sales.

The challenge for many of these potential industry investors is finding a company, or group of companies, that allow for significant sums of capital to be put into the pet industry. Once a pet company reaches $2 million of EBITDA, the marketplace becomes extremely friendly – even downright competitive.

There are a large number of companies with great products and superb management teams. If they can achieve some scale and profitability upwards of $1 million to $2 million EBITDA, they become extremely attractive to private equity investors. Since the market seems to have spoken on this, it should be no surprise to see companies moving this direction. Some of them will do it organically, while others will do it through acquisitions. This is why we have seen so many lower-middle market strategic transactions in the pet industry.

To make sense of the recent demand for pet industry companies, one has to understand the dynamics within the private equity world. Private equity is sitting on a record amount – almost $500 billion – of unused capital. This unused capital is often referred to as  “dry powder.”  As corporate profitability returns, outside capital is being put to work in stable, well-positioned companies. The positive demographics of the pet industry are attractive to this capital.

While the pet industry has been on the receiving end of much of this activity, it’s a trend that’s been developing across the broader middle market. A recent survey of fund managers found that an increased investment of capital is expected in 2012. According to the Perspective Private Equity Study by BDO, 22 percent of fund managers expect to invest between $30 million and $50 million in deals and acquisitions during 2012.

This is a significant increase, up from just 10 percent of respondents a year ago. And 16 percent of fund managers surveyed said they would deploy somewhere between $51 million and $100 million in capital over the coming year, an increase from only 11 percent last year. That means a record amount of dry powder is now being aimed at the middle and lower-middle markets. Those in the pet industry are among the most highly sought-after targets.

The sharp rise in deployed capital, along with pre-recession EBITDA multiples in private equity is an excellent signal for those looking to sell a business in 2012. The combination of pricing and increased deal flow means now is the time for private equity candidates to prepare for sale. Those in the pet industry have a great opportunity to place themselves right in the middle of this equation.