There are scores of new articles around the private equity industry right now, and specifically how it is reacting to the economy.
There’s no doubt that this is one industry which has changed phenomenally over the years and investment strategies which may have been relevant ten years ago, no longer are.
In fact, on the most part, PE’s have a much different set of questions they ask when they are thinking about taking over a company. As the title of this guide may have suggested, we are now going to take a look at these to see how things have developed.
Is the company underperforming?
This question perhaps leads us onto the first change in the industry, and how the attitude to companies has changed. Previously, the approach might have always been to acquire companies at the top of their game, but the general consensus amongst industry experts is that this is now too expensive. In other words, valuations seem to be rising – and this doesn’t favour the old tactic.
Of course, there will be some exceptions to this rule. However, according to Marc Leder, this is one of the first questions he’ll ask himself when contemplating the acquisition of a company. This means that the valuation is kept respectable – and there is always the potential to not only grow profits, but to also inflate that valuation and turn an even bigger final profit later down the line.
Why is the company underperforming?
The previous question leads directly to this one – just why was the company underperforming? In truth, there are countless reasons why this might be the case, and many of them aren’t going to be significant enough to put a potential buyer off.
Examples of common reasons behind underperformance include a lack of investment or a misguided strategy. These two examples can both be resolved by a PE company stepping in and making changes, so it stands to reason that this turns a seemingly failing business into one that’s very attractive in the eyes of an investor.
Of course, these failings aren’t likely to be obvious – and this is what separates the savviest private equity investor from the ones that have low hit rates with their acquisitions.
Is there an existing management team in place?
This final question is one that might again raise a few eyebrows. Historically, a lot of private equity investors may have looked to bring their own team in – but nowadays this isn’t always the case.
An attractive proposition for investors is if a management team is already in place. This means that there is an existing team who know the business inside-out, and can therefore assist the PE team when they are looking to initiate change.
It’s a huge hindrance if investors have to come in and appoint their own management team, who then has to “learn the ropes” and understand how the business operates before they can make meaningful contributions.