Winning Strategy for Better Investment Decisions in Private Equity

Nov 05, 2019 | Article

2018 - the year of a quick buck, reported splendid surges in global investment value that shot up to USD 2.5 trillion - the highest in 5 years. The buyout value swelled to USD 582 billion. Hugh MacArthur, global head of Bain & Company’s Private Equity practice said “We’ve seen some of the highest levels of capital raised and put to work, the most exits and decent returns,”. The past five-year span saw the PE investment fabric acutely stretched at two extreme ends. At one end, chronic competition darted the deals to historic highs, at the other, a substantial amount of PE dry powder, the amount waiting to be invested, piled up - the figure rounded at USD 2 trillion. This could be translated into more legroom for investors but it can also be inferred as their inability to milk the loaded cow.

But then private equity investments have forever been high risk/ high-return propositions. Any kind of rush is likely to backfire sooner than expected and, a poorly designed exit can turn a potentially lucrative exit into a mediocre and unremarkable departure. Contrarily, a well-conceived and implemented deal could reap substantial profits from a mediocre deal. Could there be a bigger misfortune than unutilized potential especially in the sphere of quick bulky dough? In the world of investments, we guess not! In this piece we ponder over strategies to bypass this blunder:

Plan for Entry Sweet Spots:

The contemporary buzz in PE investment corridors is centered around growing speculations on the upcoming economic downturn. This apprehension is impacting and steering investment decision-making in unconventional routes. Investors are thinking through these 5 broad parameters:

Vision: With growing buyer expectations and awareness exits have become challenging. Buyers are aware of the companies and the transparent business space those companies operate in. Short term quick-fixes are tossed out of the window. Plan for 5 to 7 years. Include historical or baseline products, emerging product lines, and future growth trajectories.

Investment: Estimate the investments required to achieve the vision keeping aside the influence of short-term earnings. Exit multiples have gone higher and so have the expectations from a successful exit.

Governance: Fast-moving technological changes are adding complexities to the deal and they are getting harder to understand and implement. Think through calibration and coordination among different stakeholders involved in the process. Different entities understand and interpret Industry 4.0 changes differently. Reaching a common consensus has become harder.

Operational improvements required: Investors need to structure their deals thoughtfully and consider both commercial and operational aspects of the deals. Many owners aren’t able to create value within the first three years of business.

Talent and incentives planning: New technologies will necessitate the inclusion of fresh talent in unfamiliar services and technology domains.

Prepare for Exit Sore Points:

A 2018 McKinsey article Private equity exits: Enabling the exit process to create significant value says the exit strategy should commence right along with the ownership strategy.

  • Hone a well-crafted, clear and fact-backed analysis delineating reasons why investing in a particular purchase would make sense.

  • Conduct a readiness assessment 1.5 years before the exit. Evaluate historical or baseline products, emerging product lines, and future growth trajectories.

  • Add value-adding performance improvement measures. Leave some value creation opportunities on the table for the prospective buyer.

  • Prepare to disclose unpleasant surprises.

  • Plan for the buyers’ inconvenient questions that may crop-up at any time.

  • In a nutshell, prepare and plan to the minutest possible detail and leave no room for surprises.

2018 - the year of a quick buck, reported splendid surges in global investment value that shot up to USD 2.5 trillion - the highest in 5 years. The buyout value swelled to USD 582 billion. Hugh MacArthur, global head of Bain & Company’s Private Equity practice said “We’ve seen some of the highest levels of capital raised and put to work, the most exits and decent returns,”. The past five-year span saw the PE investment fabric acutely stretched at two extreme ends. At one end, chronic competition darted the deals to historic highs, at the other, a substantial amount of PE dry powder, the amount waiting to be invested, piled up - the figure rounded at USD 2 trillion. This could be translated into more legroom for investors but it can also be inferred as their inability to milk the loaded cow.

But then private equity investments have forever been high risk/ high-return propositions. Any kind of rush is likely to backfire sooner than expected and, a poorly designed exit can turn a potentially lucrative exit into a mediocre and unremarkable departure. Contrarily, a well-conceived and implemented deal could reap substantial profits from a mediocre deal. Could there be a bigger misfortune than unutilized potential especially in the sphere of quick bulky dough? In the world of investments, we guess not! In this piece we ponder over strategies to bypass this blunder:

Plan for Entry Sweet Spots:

The contemporary buzz in PE investment corridors is centered around growing speculations on the upcoming economic downturn. This apprehension is impacting and steering investment decision-making in unconventional routes. Investors are thinking through these 5 broad parameters:

Vision: With growing buyer expectations and awareness exits have become challenging. Buyers are aware of the companies and the transparent business space those companies operate in. Short term quick-fixes are tossed out of the window. Plan for 5 to 7 years. Include historical or baseline products, emerging product lines, and future growth trajectories.

Investment: Estimate the investments required to achieve the vision keeping aside the influence of short-term earnings. Exit multiples have gone higher and so have the expectations from a successful exit.

Governance: Fast-moving technological changes are adding complexities to the deal and they are getting harder to understand and implement. Think through calibration and coordination among different stakeholders involved in the process. Different entities understand and interpret Industry 4.0 changes differently. Reaching a common consensus has become harder.

Operational improvements required: Investors need to structure their deals thoughtfully and consider both commercial and operational aspects of the deals. Many owners aren’t able to create value within the first three years of business.

Talent and incentives planning: New technologies will necessitate the inclusion of fresh talent in unfamiliar services and technology domains.

Prepare for Exit Sore Points:

A 2018 McKinsey article Private equity exits: Enabling the exit process to create significant value says the exit strategy should commence right along with the ownership strategy.

  • Hone a well-crafted, clear and fact-backed analysis delineating reasons why investing in a particular purchase would make sense.

  • Conduct a readiness assessment 1.5 years before the exit. Evaluate historical or baseline products, emerging product lines, and future growth trajectories.

  • Add value-adding performance improvement measures. Leave some value creation opportunities on the table for the prospective buyer.

  • Prepare to disclose unpleasant surprises.

  • Plan for the buyers’ inconvenient questions that may crop-up at any time.

  • In a nutshell, prepare and plan to the minutest possible detail and leave no room for surprises.

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