Acquisition activities remain a priority, but today’s market conditions demand that PE firms place greater emphasis on driving growth at the portfolio company level. Given today’s valuations, PE firms, in most cases, are paying top dollar for new platforms rather than finding any real bargains. Therefore, they need to focus resources to build value immediately post close. A new platform may only be worth 6.5x EBITDA, but a financial buyer may have to pay 8x+ cash flow today to win the auction. There is an immediate need to initiate a strategy to build value which must start during the diligence process.
Another way to accelerate fund growth is obviously to identify and close more deals. However, to do so in today’s market, private equity firms pursuing new platforms need to specialize and differentiate themselves. Specialization comes in the form of industry expertise or market segmentation while differentiation could emanate from company culture, involvement of true operating partners, functional expertise and even innovation. When competing against corporate investors, private equity firms must demonstrate that they are the right partner and that being the right partner may not mean writing the biggest check.
If you have to pay a turn or two higher for the right acquisition, you may need to shift the emphasis of the diligence process from risk to value. With opportunities and strategies identified during the diligence process, private equity investors can more rapidly execute on their 100-day plan.
Gain additional insight. In the video series, Strategies to Accelerate Private Equity Growth, Jeremy Swan, Private Equity and Venture Capital Industry Practice Leader at CohnReznick, answers key questions on how you can best position yourself to achieve growth amid the challenges that lie ahead.
This article represents the views of the author only and does not necessarily represent the views of PitchBook.