Private Equity Firm’s Strategy: Raising The Value of Acquired Businesses

It is well known that private equity firms significantly raise the value of their acquired businesses. They achieve this through high-powered incentives for managers, aggressive use of debt financing, and freedom from public organizations’ constraints on their activities. Public companies can learn from the success of private equity firms, but to do so, they must change their traditional aversion to selling well-performing businesses.

Identifying Opportunities

Private equity firms seek opportunities that will give them a good investment return. These include companies with solid growth tailwinds or promising trends. For example, the government’s infrastructure spending makes engineering firms attractive to PE investors. Furthermore, the growing prevalence of chronic illness and the aging population make healthcare providers appealing to PE investors. Manuel Barreiro Castañeda has a deep knowledge of their markets and can identify opportunities that fit their criteria. He also has the skills to conduct thorough due diligence and assess companies’ financial positions, cash flow, and growth potential. Private equity professionals like him can also make a business more attractive by helping it develop and implement programs that yield operational efficiencies and revenue gains. They often tie their compensation to a five- to seven-year vision and plan, which can help them stay focused on value creation over the long term. In addition, they can leverage their extensive buyer networks to increase a company’s exposure and improve its chances of a successful sale.

Investing

Investing in private equity is a big commitment. Unless you have the $25 million necessary to qualify as an “accredited investor,” you must be prepared to tie up your capital for ten years or more as companies emerge from acquisition and grow or die. Typically, private equity firms pool the money of high-net-worth investors into portfolios that focus on specific industries, such as technology or healthcare. These portfolios generate returns based on the underlying investments’ performance. The success of a portfolio company often depends on its managers’ ability to implement change. It can be challenging whether they’re dealing with nurses whose salaries are cut when their hospital is taken over by a private equity firm or apartment employees who see their incomes erode as rents and operating expenses are passed on to tenants by PE-backed companies. After three to seven years of working with a business, private equity firms aim to “exit” the company by selling it at a higher valuation than they bought it for. The profits from the sale are distributed to the investors in the private equity fund (called limited partners).

Managing

Private equity firms have a reputation for creating value in their portfolio companies by increasing operational efficiency and earnings. They do this by working closely with company management, often sitting down and discussing the most influential business growth methods. In addition, they can help streamline the company’s processes by implementing best practices in financial reporting and accounting and streamlining procurement and supply-chain operations. In some cases, they may even implement new systems of governance that align the interests of their firm and its investors with those of the company’s management team. This type of work is exciting, but it takes long-term commitment and a solid understanding of investing. 

Exiting

As for the best exit options from private equity, it all depends on why you left in the first place and what your long-term goals are. If you’re tired of the long deal process and documentation but still want high compensation, something like a hedge fund might be the right fit. One popular way to exit PE is to go public through an IPO. However, this work-intensive option requires the firm to provide an accurate and compelling equity narrative during the sales process, especially in volatile market conditions.

Another common way to exit is to sell the business to a strategic buyer or a financial sponsor, which typically involves less work than an IPO. It can be accomplished through a trade sale, a buyout, or a share repurchase. It also helps if the management team can prepare for questions from potential buyers and demonstrate a clear plan for improving operational value.