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How Private Equity can Maximize Performance

Record levels of carve-out deal value 

The extraordinary challenges of 2020 caused economies to slow, and in many cases enter recession creating a set of market conditions ripe for M&As and carve outs. Historically, distressed M&A activity rises significantly in the wake of recession. Data shows that activity peaked one to three years after each of the last two global downturns reached its height. With this in mind, it's perhaps not surprising that Pitchbook's 2021 Outlook1  predicts carve-out deal value will hit the highest level on record.

2020 was about stabilizing and recovery - now it's time to focus on rebalancing the portfolio

Rapid changes in consumer behavior and supply chain and operations models caused by the pandemic forced businesses to enter stabilization mode in Q2 and Q3 of 2020. Later in the year, as they began to implement recovery and rebalancing strategies, corporate CEOs re-examined their organizations to ascertain which assets generated the most sustainable cash flow and were the best fit for the organization's long-term strategy. The next step in the recovery/rebalancing process is to divest the non-core assets to further mitigate asset-related risk, obtain free cash flows, or for liquidation requirements.

Carve Out 2021 Blog Image

On the other hand, some corporates, as well as PE firms, are looking to acquire businesses which will strengthen their position, and with adequate focus, realignment and investment they can turn these assets into highly-profitable stand-alone businesses. Historically, the majority of middle-market private equity firms have not capitalized on investing in carve-outs. In a recent survey of 100 senior level global PE executives conducted by Dechert and Mergemarket2 only 17% of respondents stated they were planning on carving-out units of portfolio companies. In our experience this reluctance is often due to the fact that many middle-market firms lack operational experience of carve-out transactions and so are put off by their seeming complexity. However, an increasing amount of PE firms have operational value creation embedded in their culture and are capitalizing on these opportunities. We anticipate that more firms will continue to explore carve-outs as competition increases, undervalued deals become scarce and valuations remain frothy.

The sellers' paradox

With many corporates negatively impacted by the pandemic, countless firms are looking at selling non-core assets and finding themselves caught up in a paradox. They need the process to be as quick as possible to release cash. At the same time they want to maximize value creation to attract potential buyers. In addition, they need to allow possible bidders time to conduct a thorough due diligence. This is indeed a dilemma, but it is escapable.

For corporates and PE firms looking to carve-out divisions, business lines or subsidiaries, the challenge is to maximize deal returns and realize unexpected quick wins before the division is sold in this challenging pandemic environment. For example, we have helped many private equity firms implement demonstrable LTM (last twelve months) results (delivering up to 60:1 ROI for one firm), support management and provide a clear road map for further improvement before exit. And it doesn't have to take six to nine months. In another recent example we implemented a significant supply chain improvement program with our teams and client working on a 100% remote basis. This delivered a 3:1 project ROI that we anticipated would lead to an 8-10:1 multiple for our client on exit in less than six months.

The buyers' paradox

More than 60% of respondents to the Dechert/Mergemarket survey stated that they expect to increase the number of carve-outs targeted by their firm in the next 12-18 months. This increase will be fueled by the  $1.5T3 of dry powder investors have accumulated as a result of last year's reduced LBO activity combined with healthy fundraising. We can expect competition to be fierce in 2021 as investors look to home in on companies and sectors that have proved resilient during the crisis (such as chemicals, healthcare, technology and life sciences).

With so much cash available, private equity is well positioned to take advantage of distressed companies in the market. The challenge is to successfully fight off other PE firms and strategic buyers to buy those assets at the lowest multiple while leaving enough value creation opportunities on the table. To stay ahead of the game, potential buyers are increasingly making use of data analytics and operational due diligence to identify and screen fast growth businesses, determine with confidence where the opportunities for value creation lie, and quickly uncover any underlying commercial risk. One example is a PE firm looking to take a publicly-traded technology company private. Analytical insights provided during due diligence gave the firm the confidence to raise their investment commitment and ultimately acquire the business. Implementation of the opportunities that were identified delivered a 6:1 ROI and almost doubled EBITDA. Analytics-driven due diligence helped another Maine Pointe PE client uncover millions of dollars in supply chain synergies and opportunities which, post-acquisition, helped them realize 20% savings on raw materials within four weeks and annualized savings of 50% in four months.

If you would like to discuss any points raised in this article or want to find out how drive accelerated and measurable value pre-exit, or to enhance your win chances through analytics-driven operational due diligence Joe Esteves,, for an informative discussion.

1Pitchbook 2021 US Private Equity Outlook

2Dechert 2021 Global Private Equity Outlook

3Preqin data and analytics

About Maine Pointe

Maine Pointe, a member of the SGS Group, is a global supply chain and operations consulting firm trusted by many chief executives and private equity firms to drive compelling economic returns for their companies. We achieve this by delivering accelerated, sustainable improvements in EBITDA, cash and growth across their procurement, logistics, operations and data analytics. Our hands-on implementation experts work with executives and their teams to rapidly break through functional silos and transform the plan-buy-make-move-fulfill digital supply chain to deliver the greatest value to customers and stakeholders at the lowest and cost and risk to business. We call this Total Value Optimization (TVO)™.

Maine Pointe's engagements are results-driven and deliver between 4:1-8:1 ROI. We are so confident in our work and our processes that we provide a unique 100% guarantee of engagement fees based on annualized savings.

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