Why is Private Equity So Successful at M&A?

An Article Synopsis

This article, "Top 5 Reasons Private Equity is So Successful at M&A", published by Woodruff-Sawyer & Co (an insurance brokerage and consulting firm), strives to explain why businesses owned by private equity often outperform peer group competitors and increase their value substantially.

"...why businesses owned by private equity often outperform peer group competitors and increase their value substantially."

The first reason that the author cites is Research:

“Understanding the need for research. Private equity understands that much of the return on investment is based on their ability to acquire businesses in the best way possible from the start and to minimize their risk. They invest heavily in identifying acquisition targets that fit their criteria, perform substantial industry and competitor research before making an offer, and rarely overpay for a business. Part of their targeting includes identifying underperforming businesses that can be improved through better management and proper investment in critical areas.”

My take on this:

The author got it right, but did not go far enough.

Research is useful in acquisition search, very pertinent in conducting diligence, and absolutely critical to the process of selecting a growth strategy (and staying on course).

The reason that research plays a substantial role in helping increase value along the way is actually fairly simple.

It starts with a set of investment hypotheses to test. The preliminary assumption that private equity investors have is that they can increase the value of the business better than prior owners.

If the market research reveals that their hypotheses are likely untrue, the deal will not happen in the first place. (Hence eliminating a substantial percentage of acquisitions that could have failed to perform.)

But if their hypotheses are true, the research reveals two critical elements that savvy Private Equity investors will ask their management teams to seize upon:

  • External (market, customer, competitor, and supplier) Positives (our business’ relative strengths or the positive dynamics of the markets we play in).
  • External Negatives (our business’ relative weaknesses or the threatening or risky dynamics of the markets we play in).

Knowledge about the positives and negatives is not simply used for business diligence purposes; it is absolutely critical to formulating the growth strategies of the Company, post-close! And it is those chosen paths that lead to outperforming the market as a whole.

We look forward to hearing about what’s keeping you up at night.

Christopher “Kit” Lisle, founder and managing partner of Acclaro Growth Partners, directs Corporate Development and Strategic Planning for Acclaro as well as lending support to teams delivering projects in M&A, marketing, corporate growth planning and quasi-turnarounds.

Kit's experience in market intelligence is based upon his military intelligence services as well as working for private companies. Prior to Acclaro, he served as Vice-President of Acquisition Services for Markowitz and McNaughton, developing extensive experience with market-entry analysis and market due diligence. During his military career, Kit served as an intelligence officer in the U.S. Army: he was a Eurasia Desk Officer in the Office of the Joint Chiefs of Staff at the Pentagon.

Acclaro Services - Traditional, Post-LOI Market Diligence

Acclaro Growth Partners is a research-based strategy consulting firm that provides market/business due diligence, strategic market insights, and market growth planning, serving private equity and corporate clients.

Contact: kit@acclaropartners.com or call 703.434.3597

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