Private Equity Firms: Buy-Forever Strategy to Buy-to-Sell Strategy

Posted by Rohan Parambi on Oct 16, 2018 3:20:00 PM
Rohan Parambi
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With roots in the early 1950s and 1960s, private equity (PE) and venture capital (VC) engagements in the U.S. and global economies in the mergers and acquisitions arena, specifically acquisitions, have steadily increased and evolved. Private equity (PE) activity took hold in the 1980s, as the U.S. and global economies accelerated, spreading itself across the globe with a significant proportion of it focused on U.S. and European markets.

PE institutions' primary objectives are focused on profitability, yield, growth and performance, where they have a proven track record. The only slowdown in the industry has been during economic downturns.  Even the 2008 crisis only temporarily slowed PE investment. However, the event demonstrated a turning point and a shift in fundamental strategies incorporated by PE institutions since the 1980s.

Acquisition strategies of PE firms have evolved in a multitude of ways; in their nature as acquisitions through partnerships or as individual investment firms or other factors like the financial status, size or specialization of the acquisition under consideration. A more significant strategic change in the last couple of decades has been in the fundamental length of their acquisition ‘hold’. Initially acquisition exits, or transitions, were not common. Over 50% of acquisitions today are exited within 3 to 5 years. Until recent shifts, exits were often seen as quick as 1 to 3 years; a trend that has since subsided. The shorter time frame not only means that up front acquisition analysis must be concise and rigorous, but strategies and execution must be agile, deliberate and rapid.

As the global economy changes, some of the key reasons for change in hold periods include:

Available capital and demand for quick yield and return on investments

In comparison to the late 20th century, the volume of capital available in today’s growing economy is significantly higher (except for the 2008 crisis). Sources of capital availability include, the banking sector that has reconfigured itself to serve transaction heavy acquisitions, large pension schemes, as well as private family funds, all playing an active role in the PE space demanding strong, quick returns.

With this availability of capital and market competition with technology and health care giants, the demand for a strong and rapid return on PE firm investments has increased.

Until recently, lower interest rates have been available, allowing PE firms to take advantage of the propagation of capital availability.

Transition Arms for Corporate Spin-offs

As the public sector moves away from ‘diversified’ business models, and chooses to rapidly spin off segments, due to profitability or the need to raise capital, PE acquisitions and short-term holds have increased (e.g. J.M. Smucker, G.E. Industrial Engines). This facilitates short term PE ownership of these assets as they ‘flip’ them and transition them to another entity, or PE firm.

Strong Performance of Initial Public Offering

Whether private companies, start-ups or PE firms, the continued growth of the global economy has resulted in the strong performance of initial public offerings (IPOs). The opportunity has been taken advantage of by PE firms, as they quickly spin off well-developed assets they are invested in via a complete or partial exit.

Public Sector Strategic Acquisitions

While some public companies have spun off diversified assets, some have trended towards specialization of their core businesses; purchasing assets managed by PE firms for rapid growth (Xylem, Unilever, Crown Castle), resulting in shorter hold periods for PE firms, as these opportunities arise.

The changes in the global economy, along with these reasons, envelope some of the key factors that have created strong conditions for PE firms. As regulations and investor requirements change, the last few years have demonstrated new shifts in strategies. Additionally, increases in valuations, interest rates, concerns surrounding potential bear markets and regulatory tax code changes have resulted in PE firms focusing in on medium term acquisition hold periods. These changes often result in PE firms relying on additional resources, support and expertise, to achieve the outcomes envisioned. 

CGN's expertise:

Transforming businesses globally by delivering the unexpected.

PE firms move through a multi-step approach, starting with initial evaluations and planning periods prior to an acquisition, following which they move into change management, implementation, and a planned exit transition.

CGN’s capabilities align extremely well with the needs of PE firms, post-acquisition to transition or exit, especially with CGN’s core strength in rapid, agile transformations. The firm's expertise in operational analysis and improvement, execution, and value creation can play a critical role in supporting PE firm acquisitions. CGN’s core abilities, practiced solutions can support the most pressing needs that PE firms seek support in; maximizing returns, faster, making CGN the ideal strategic partner.

PE Firm Acq timeline
Further Discussion