Despite three years of frenetic exit activity, private equity (PE) firms continue to focus on divestments, with exits up 10% in 2017. Looking to the future, firms have more than US$633b in available capital — more than ever before — and we expect to see more deployment of capital in the upcoming year.
Competition for quality assets has been fierce and valuations reached new heights, with the average EV/EBITDA multiple closing in on 11x last year (per Pitchbook, as of 31 March 2017), the highest since the financial crisis. PE firms seeking to maintain or improve valuations can expect to be challenged on their pricing.
Unlocking portfolio businesses potential to benefit from digital and technological changes could be the key to securing greater value. PE firms that exploit the power of data and analytics tools at every stage of the transaction process will be able to build a powerful value case for their most attractive assets.
On average, 74% of PE executives struggle to assess the effect technology may have on portfolio company value. Among firms with AUM greater than US$30b, the percentage climbs to 95%. This needs to improve if PE expects to make the most of divestments in a technology-driven marketplace.
Just as important as using the right analytics tools are the people. Almost three-quarters of PE executives (73%) find it challenging to identify the right team to assess the impact and value of evolving technologies in their portfolio.
The organic growth potential of a target is becoming critical to the PE exit strategy. While a quarter of firms cited this last year, it now sits near the top of the list at 43%. Amid high valuations, growth opportunities will help PE firms build on their purchase price and offer future buyers a growth trajectory for the business.
Technology can create pre-sale value, whether by resolving vulnerabilities (e.g., by improving cybersecurity) or improving margins (e.g., by cutting costs through automation). The key is to identify which technology will add the most value in the time available and determine who will own this process (e.g., operating partners, deal teams or a combination of both).
Almost two-thirds (61%) of PE executives now determine the right time to sell 12 months before the exit — up from 35% in our 2017 study. With rising valuations, PE funds cannot expect an opportunistic approach to automatically work.
More than ever, tax policy can make exit plans less viable, or alternatively, offer new opportunities to improve value. New policies are reshaping the tax profile of businesses, from US tax reform to the OECD/G20 Base Erosion and Profit Shifting (BEPS) project cascading through Europe.
Sixty-eight percent of PE executives say they highlighted tax upsides to purchasers in their last exit.
Most buyers will expect digital to be part of the sale narrative, predicated on changing business models, processes, products and services. Sellers must be prepared to show how the business performance has fundamentally changed as a result of digital improvements.
Only 68% of PE executives say they used analytics during buyer negotiations, but this was the activity that the largest group of sellers we surveyed (33%) say created the most value. Financial modeling analytics and scenario planning with potential buyers can resolve doubts and help determine where to deploy resources and prove the value case.
Drilling down into a portfolio’s performance can give buyers the information they seek during diligence, reducing potentially conservative valuations. Over three-quarters (77%) of firms did so, with 28% saying this uncovered the most value during an exit. Analytics can shorten the diligence period by helping buyers identify opportunities to grow revenue, such as customers or markets; improving operations to deliver better margins; or rightsizing or outsourcing the workforce.
Amid higher valuations, private equity sellers must work harder to justify pricing during exit processes, even in an era of tough competition for the most attractive assets.
It’s time to think differently — by exploiting data and analytics tools to prove value during every stage of ownership. Investing in talent with strong digital and technology experience, as well as the tools to extract and process data, will improve decisions around exit strategy and planning.
Quantifying the value of your business, and using technology to do so, will help build a compelling value narrative to appeal to a wide a range of buyers. Collaborating with buyers during the diligence process, by sharing data and identifying areas for revenue growth, can also help increase the value of exits.
Private Equity Divestment Study PDF