Private Equity is an intricate world where fund managers embark on a journey that spans a decade. While the typical Private Equity fund lifecycle is around ten years, it can extend as long as 15 years. Each carefully orchestrated step of the lifecycle demands unwavering attention to detail, strategic acumen, and relentless commitment to maximizing returns.
Invest and Acquire
Target Identification and Screening: Potential target companies can come from many different sources such as in-house research, company presentations at conferences, sell-side investment banks, M&A attorneys, direct pitches from the target, sourcing platforms, existing portfolio companies, and even other private equity firms. Regardless of the source, the importance of securing strategically best-fit investments is critical.
Due Diligence: The investment team must ensure a promising target is the right strategic fit for the fund. Namely ,the due diligence process, which effectively quantifies the risks, costs, and opportunities associated with a business transition. The most commonly performed analyses are financial due diligence, or quality of earnings, and tax due diligence. A clear understanding of the target’s financials is vital to a successful investment. Human capital due diligence and cyber due diligence is also crucial for maximizing value. The most thoughtful projections are meaningless if the target lacks the personnel, systems, technology, and security to implement them. It is important to identify and mitigate risks, accelerate transition timelines, and minimize cost variability to ensure you achieve the transaction priorities and investment theses.
Deal Structuring: The time and resources invested in due diligence are worthless if the transaction isn’t structured correctly. Deal structure will determine how the transaction generates value for all stakeholders. You should consider the risks affecting the close of the deal along with issues that may arise in the future.
Closing: Signing the final agreement is the start of the closing process. In addition to addressing any human capital and IT needs, the acquirer begins the sometimes-lengthy purchase accounting process. Although the complexity will vary based on the legal structure and size of the transaction, every transaction has immediate implications. These need to be properly accounted for and documented.
How BUCS Supports: Once the letter of intent is executed, BUCS establishes connections to support a consistent flow of data. Knowing what data you will receive and the format you will receive it in, helps expedite the confirmatory procedures that support the due diligence and quality of earnings procedures, allowing teams to spend more time understanding risks and identifying opportunities post close. When the right information is at the acquirer’s fingertips, it reduces the burden on the sell side team and allows the buy side team to be more efficient, minimizing deal fatigue. Our data management platform can also be used to calculate metrics defined in the close, such as a PEG ratio, to make measurement clear and visible to all parties post close with minimal effort.
Build, Manage and Grow
Once an investment is made, the clock starts ticking. A private equity team must work swiftly to establish a track record of exceptional performance. Waiting until just before an exit to make improvements is not an option, as potential buyers consider medium-term historical performance when conducting valuations.
During the hold period, which typically lasts 3-7 years, the acquirer creates value by driving process transformation, optimizing operations, and maximizing the financial performance of the portfolio company before positioning the business for an exit. In this stage, PE firms leverage their experience and networks to refine the acquired company’s strategy and grow EBITDA through improved risk controls, functional processes, operational infrastructure, and human capital development.
How BUCS Supports: When a company brings on institutional capital, the burden to provide information to the new stakeholders increases significantly. Post close companies use our data management platform to help automate this flow of information, building investor confidence and eliminating the need for additional FP&A resources. Additionally, the due diligence process provides automated valuable information. The information surrounding risks and opportunities leverages post-acquisition efforts. If the company continues to grow through acquisition, consolidation of datasets becomes simple. Leadership can clearly see performance across the growing entities in one location. Our data management platform provides a near real-time data flow, so analysis is always current. Whether you’re evaluating working capital, labor efficiency, pricing strategy or another complex area of your business, our data management platform allows for clearer articulation of the situation and the ability to better manage and measure performance.
Exit
Whether through a trade sale or IPO, the exit is where most of the investment return generates. The proper timing and structure for the exit are vital to maximizing the return. Success forms from target identification and refines throughout the life cycle of the investment. Every stage of the investment should build a well-supported narrative of why the company represents value to its next owners. Similar to the invest/acquire stage, we recommend due diligence in order to properly prepare for an exit. Performing sell-side financial due diligence allows the seller to identify potential issues ahead of a buyer and set the narrative while also establishing a view of adjusted EBITDA for the most recent twelve-month period. This puts the seller in a stronger position when it comes to setting the enterprise value.
The longer an investment remains in a portfolio, the higher the required exit price to meet target Internal Rate of Return (IRR) goals. When investments linger beyond the fund’s official ten-year term, several options arise. The investment may sell to a secondary fund, the fund’s term may extend for one to three or more years, or a fire sale may occur. Private equity professionals prefer exits with multiple potential buyers and avoid forced fire sales. Fund extensions can hinder the operations of a new fund, creating additional complexities.
How BUCS Supports: The BUCS data management platform helps articulate the story of the company going to market with automated information for CIMs and other key deliverables. Reduce the number of people involved with readily available data. Data can easily limit visibility to a buyer. By leveraging our data management platform throughout the private equity fund lifecycle, you can proactively tell the story you want. Build confidence in a buyer that ownership can be easily transferable without a learning curve and disruption of day-to-day operations.
Private Equity Fund Lifecycle in Conclusion
The private equity fund lifecycle is a demanding, protracted journey that mandates resilience, expertise, and strategic thinking. Success in this domain hinges on a fund manager’s adept navigation of each stage. The manager must meticulously target identification, comprehensive due diligence, and astute deal structuring. The endless focus on value creation, management, and growth reinforces the belief that an exit is not an option. Ultimately, the strategic exit marks the realization of the investment’s full potential, maximizing returns for investors and stakeholders alike. In the world of private equity, each stage bears significance. Every decision carries weight and the journey itself possesses intrinsic value equal to its destination.
