Ongoing market disruption can present many opportunities, as EY illustrates in its latest Global PE Watch. “Ten years ago, who would have considered that Amazon would someday have an interest in Whole Foods or that Walmart would acquire Bonobos? Strategic acquirers are casting wider nets as they look to remain relevant in a world of increasing disruption and uncertainty. Viewing disruptive forces as a chance to market to a wider array of buyers is a significant opportunity.”
Opportunities and threats from digital disruption increasingly need to be factored in because these will affect how the asset is positioned for sale. “Think back to the rapid emergence of Uber technology, which has clearly impacted the transportation sector,” asks Fredrik Bürger, private equity operating partner at EY UK & Ireland. This knowledge about emerging technology transforms how one views such competitive arenas. Indeed, companies now are regularly conceived, launched and able to disrupt entire industries in less time than the average private equity holding period.
Identifying the buyer
While a potential buyer pool will evolve over time, vendors cannot start working on it early enough. “Targeting as many as five buyers from the outset, creating bespoke equity stories for each and refining this through the holding period are essential steps. PE firms today must customize the vendor package — hoping for broad market appeal won’t work,” says Honnywill.
This means identifying information gaps and key buyer questions, targeting timelines that maximize returns and aligning key stakeholders. Whether the exit is conducted through a single buyer or auction process, working with potential buyers through the holding period is invaluable.
John van Rossen, EY EMEIA Private Equity Leader, refers to an example from an EY project in which a proactive origination strategy enabled a private equity firm to beat a corporate bidder at auction. That corporate rival immediately became a leading potential buyer of the asset upon exit.
“From very early on, the sales team was in touch with the corporate, determining what they needed from the acquisition,” he says. “There was an ongoing dialogue with the corporate about what it needed to look like on exit in terms of operations, client base and the product shelf.”
The maxim is start early: focus on exit at the beginning, devoting resources to keeping contact with potential buyers to create a business that fits their requirements. To offer the best price, any potential buyer will need to be convinced that the asset is a strong fit, able to generate ongoing value for its new owners over the long term.
EY research found that the equity return from private equity exits is more than three times that of public company benchmarks; the additional return above and beyond public comparables is largely a function of strategic and operational improvements in the company.
But the value of the latter can only be realized if purchasers are convinced that the improvements are a good fit for their needs and, hence, worth paying for. The best way to ensure that is consulting with them over a protracted period.