Two types of private equity-backed exit have occurred in recent times. The first entailed executives being ejected from a company with the explicit understanding that they ‘never darken these doors again’, while the other was of the more traditional variety involving a lucrative sale. Thankfully it’s the latter that is now the focus for many PE firms and their portfolio companies.
The notion of a ‘perfect exit’ is perhaps misleading. Each business will have its own challenges to overcome, as will PE firms given the lifecycle of their particular funds. Criticaleye spoke to a range of leaders within private equity to canvass their views on what needs to be done in order to get the odds in your favour when selling a business.
1) Management Must Take Charge
Time and again executives are too subservient to their PE backers when it comes to defining and driving an exit.
Andy Dunkley, CEO of jeans brand Lee Cooper, who completed a $72 million (£47 million) trade sale to US company Iconix earlier this year, advises: “In the current environment there are a number of private equity firms chasing only a few opportunities. Investment periods have been extended to the point where many PE houses are desperate to find an exit. The challenge for senior management is to take the initiative and outline a vision for the future. Ask yourself: ‘What’s the next stage?’”
Don’t leave anything to chance. Sam Ferguson, Chief Executive Officer of information management provider EDM Group, argues that some PE firms “get mixed up and think it’s their job to be running the business”, when what’s needed is a backer who can provide extra investment where necessary or support when looking to do acquisitions.
The expectations of management and the PE firm need to be set out from day one (the chairman has a huge role to play here) and, if you get that chemistry right, everything becomes a whole lot clearer. “It’s great to have money men that have got faith in your team and are prepared to back your ideas,” adds Sam.
2) Trade, Secondary or IPO?
When it comes to deciding on an exit, market reality will inevitably clash with wishful thinking but it’s essential to scope out the likeliest options.
Terry Stannard, Chairman of the PE-backed TSC Foods, comments: “Our preferred exit route would be trade because there may well be synergies [for a number of potential buyers] that represent value, but we are equally clear that the business has sufficient growth in it to be attractive to another PE house.
“Once we’ve decided we’ve built sufficient value in the business for existing shareholders, while also having enough growth left for future ones, then that will be the right time for us to exit.”
Andy says: “When I joined Lee Cooper in 2008 and looked at where I wanted to take the business, we came across an exit partner in Iconix, which was a licence only business. Although this was way too early in the process to think about selling the business, I suddenly realised it was a business model that could work for us and that it might be a viable exit route.”
Say it quietly, but the public markets are also an option. John Kelly, Chairman of Novus Leisure, says: “Some of the bigger companies are heading for IPOs and it is a healthier market than it has been. Just look at the equity values; the IPO market is there now. It’s going to be tricky and secondaries and trade are still areas where, if your business is shaped properly, they’re more immediate opportunities than an IPO, but at least it’s another option which didn’t exist a year-and-a-half-ago.”
Carl Harring, Managing Director of PE firm HIG Capital, agrees: “We’re in the sale process for one business which we thought was going to be a trade sale, but we were advised to consider an IPO; so we’ll probably do that now and run a dual track.”
3) Get Fit for Purpose
Lack of access to capital, unsustainable debts and radically changing markets, have seen a number of management teams and PE firms fighting to get businesses onto an even keel.
“It’s taken [the UK] a while to stabilise since 2008,” says Sam, whose business, EDM, recently acquired US-based competitor DIT. “We’ve still got the ongoing effects of that period in that funding is not as readily available for growth capital. It is there but looking at five times or six times multiples for earnings is no longer the norm; it’s now more like three times, even for companies that are doing well like ours.”
According to Carl, European businesses have been slower to deal with their cost bases and are facing the tricky task of trying to deliver sales within a leveraged structure. “It’s a case of needing to right-size the business, making sure that you’ve got the right management team in place as they’ll soon need to move from fire fighting to a strategy for growth,” he says. “It’s very important for board-level executives and non-executives to realise we’re in a very different environment right now and maybe we need some different skill-sets.”
4) Is the Business Built to Last?
The goal for any PE firm and management team should be to build an excellent company with bags of potential. Terry says: “In the early stages we invested in people and marketing to develop the branded side of the business, which will help with the value on exit. At the time it represented an extra cost… but there was an acceptance that this investment would make us more attractive to buyers and I think it was a far-sighted attitude by the PE firm.”
For Carl, whose firm, HIG, recently closed its second fund raising in excess of €800 million (£698 million), the numbers have to stack up for a business and it’s then a case of devising ways to ramp up sales. He explains: “Typically, what we do with all our investments is that we go in and [improve] financial reporting, which gives the management team clarity on what the business is doing. There is a big focus on cash and reinvesting it into profitable growth…
“We’re also good at making the sales force better in the way they are structured, incentivised and interact with customers. A lot goes into pricing and sales force efficiency, then applying resources where they should be able to drive growth.”
It can also be useful for a PE firm to open its little black book of contacts, especially for smaller companies. Paul Brennan, Chairman of OnApp, which provides cloud software for hosting providers, says: “My experience with good PE houses is that they are well-connected and probably have different portfolios of investments, which can be part of the overall value chain or ecosystem that you’re working in. Therefore, they can help you connect the dots between partnering and end customers; sometimes they can help with technology transfer too.
“So rather than providing money, the benefit of PE is really all about the access to markets and to connections, be that individuals or companies, that you probably wouldn’t have access to otherwise.”
5) Manage Your Talent
Succession is a serious issue. There simply must be people who can step up and take on the senior management roles after the exit, otherwise there can be ugly discussions about how long executives stay on and where the intrinsic value in the company lies.
This raises questions around incentivising the best employees and how to identify and nurture talent. “You set out to create a great company that will get stronger each year, so that if a trade buyer acquires you they are doing it because they are buying the assets you’ve built up in terms of people and ideas, and you know the company will be around long after you’ve exited,” says Sam.
Tania Howarth, Chief Operating Officer of frozen foods company Iglo, puts a different spin on succession and broadening skills: “PE firms are missing a huge opportunity because they have to take a risk on too many people too often, when they could be moving the talent around from within existing businesses.”
The timing of moving management around would need to be handled carefully, but there seems to be sense in transferring individuals to sharpen their overall leadership skills (like you would in any corporate). “What PE firms generally don’t seem to do is to look at the talent they’ve got across their portfolio,” adds Tania.
Sure, there are zombie private equity firms, snared by a business model that was created for an economic environment that no longer exists. They can’t raise new funds and they can’t sell portfolio companies – it’s a case of winding down operations, slowly.
But that’s not the whole story by any means. Good PE firms realised that the toppy valuations and over-leveraged markets of 2007 were abnormal and have since made the necessary adjustments. These firms are now raising funds and executing deals – as opposed to sitting on their hands, waiting for things to return to how they once were.
For management teams on the exit journey, as we’ll be discussing at our forthcoming Private Equity Retreat, it’s a case of having a vision, communicating with investors, generating some competitive tension in the marketplace and using advisors wisely.
All of this won't count for much unless the business is performing well. If you’re looking for a fulsome exit, then hit your numbers and demonstrate the case for scale and future growth.
I hope to see you soon.