Private equity (PE) providers are enthusiastic investors in knowledge intensive business services. Last year was marked by some headline grabbing exits and new investments by the largest global buyout firms and this had a re-affirming effect on PE’s keen interest in this space. These included KKR’s acquisition of Optiv Security from Blackstone, as well as the sales of AlixPartners by CVC and the divestment of Carlyle’s remaining stake in Booz Allen Hamilton.
Our own experience of achieving many great outcomes for clients who secured PE investment in 2016, and the line of investors queuing at our door for deal flow, bodes well for owners in 2017.
Sustaining growth in successful businesses – an owners challenge
A challenge for many owners of valuable businesses is the changing attitude to risk that creeps up as success is achieved. It’s natural for sentiment to shift from value creation to value preservation. While natural, it’s also a sure sign that owners’ personal financial portfolios are out of balance and a warning that excess cautiousness will be sub-optimal for their business in the longer term.
PE can be a very flexible solution for owners – whether for a full exit or a partial value realization that enables owners to de-risk and retain an interest in the future upside. Good PE deals bring focus, fuel for growth, and alignment by financing management and equity succession. When owners extract value, caution is more comfortably replaced with fresh ambition.
What does private equity look for?
PE will look for specific traits in a consulting firm and we highlighted many of these in our 2016/17 Buyers Research Report.
Our research revealed that PE has a particularly strong interest in management consulting, IT services and media segments, as well as within the financial services and healthcare sector verticals. Nevertheless, most PE investors are generalists and will invest across all knowledge intensive services sectors.
The key attributes they seek are strong management teams, robust long-term drivers for growth and barriers to entry propped up by proprietary methodologies and intellectual property. The presence of these characteristics are usually reflected in key performance indicators (KPIs). The table below, extracted from our 2016/17 Buyers Research Report shows the average minimum acceptable KPIs that corporates and PE said they seek on an acquisition opportunity and illustrates how PE choose to be more discerning with respect to business performance.
Interestingly, the survey results in our Buyers Research Report also shows that PE is often prepared to pay a higher price than trade. The table below shows the average historic EBITDA valuation multiple that corporate buyers and PE investors said they were prepared to pay for growing businesses.
Of course, the prices actually paid depend on the business, the buyer and their needs and a simple average belies a range of individual buyer attitudes. The purpose of the M&A process is to uncover, through market insight, competitive tension and negotiation, the maximum value and best structure available in the market.
At Equiteq we work with owners throughout their growth to exit journey and provide the tools for equity growth assurance that will drive up performance. The reward for owners is in achieving higher valuations and being best positioned for a future a sale.
If you are ready to sell your business, whether to trade or private equity or to begin optimizing how you grow to attract high values in the future please get in touch with us for a confidential conversation.
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