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The collaboration between a Private Equity (PE) firm and a portfolio company during an acquisition is a powerful partnership. Together, they create a synergistic environment where growth and value thrive. In this article, we will explore insights from Barak Routhenstein, Vice President of Corporate Development at Profile Products, on how PE firms can provide invaluable support to portfolio companies during the acquisition process, setting the stage for success and maximizing value creation.
"A valuable PE sponsor is not just involved in communication but also steps in when things get overwhelming." - Barak Routhenstein
How PE Firms Evaluate Potential Acquisitions
When private equity (PE) firms evaluate acquisitions, several key factors come into play.
- Economic and Financial Variables
PE firms ensure the potential portfolio company is thriving and growing with healthy EBITDA margins. They prefer companies with robust growth and prospects of maintaining or increasing margins post-acquisition due to synergies.
- Strategic Fit
The buying firm needs a compelling narrative for why acquiring the business makes sense and how it complements its existing portfolio.
- Cultural Fit
Cultural alignment is crucial to foster effective collaboration and prevent deal disruptions. Cultural mismatches can hinder negotiations and post-acquisition integration. Therefore, cultural alignment deserves proper consideration unless there's a plan to change management and overhaul the corporate culture.
Relationship Between PE and Corporate Development
The relationship between a corporate development leader and private equity firms is vital in M&A. It can range from highly supportive to more distant, often depending on trust levels. According to Barak, the best approach is to have regular touchpoints to foster connectivity and transparency, while aiding in sharing ideas and potential opportunities.
The relationship must balance communication and aligned goals. The PE firm aims to maximize shareholder value, while the corporate development leader ensures alignment with the PE firm's vision. By working closely together, PE firms are able to see if corporate development needs help managing acquisitions, and can step in to help anytime they can.
How to Deal With Acquisition Conflicts
There may be instances where the M&A team strongly supports pursuing a deal, but the private equity firm does not share the same enthusiasm. To avoid this incident, there must be established boundaries regarding specific areas or sectors to avoid. Communicating this early on helps the team focus their efforts and avoid spending time on opportunities that do not make sense.
Advice for Success
Barak advises PE firms to prioritize frequent communication when supporting portfolio companies. During the initial stages of establishing the M&A function, it is important to have open discussions about operational boundaries, reporting expectations, and M&A processes. Prioritizing key information and maintaining transparency regarding workload constraints can effectively manage reporting requirements.
As for new Corp Dev leaders under a portfolio company, it's important to be open, honest, and vulnerable enough to seek guidance when necessary. Engaging with private equity partners for assistance in sourcing and pipeline development is crucial. Remember that PE firms have valuable insights and can provide support in building a strong pipeline. Don't hesitate to ask for help and leverage their expertise.