Private Equity [PE] firms raise money from wealthy individuals, pension funds and insurance companies. They source deals to acquire companies, perform the required due diligence and use the money raised, to close those deals. The new PE equity investor will usually have specialist knowledge of particular sectors. Using that expertise, they seek to improve the acquired companies’ operations; cut costs and tighten up the management structures. Once they have carried out these tasks, they seek to sell individual companies to make a profit for their investors.
Private equity firms target companies for takeover based on a variety of metrics such as the type of products produced; the company’s marketing strategy; the quality or otherwise of senior management; the sector the business operates within; its financial performance and valuation and potential exit strategies.
Many prospective target companies are offered to PE firms by their owners, bankers, Examiners, or even governments, in the hope the company can be turned around and made profitable again.
Generally we see an increase in PE firms’ acquisition activity in the years immediately after a crash and an increase in their selling activity before another crash occurs. Right now, PE groups are selling businesses at a faster rate than in the years leading up to the last financial crisis as they seek to cash in on strong equity prices while the global economy remains strong.
The Centre for Management Buyout Research in an analysis of deal volume, estimates that PE groups in Europe generated sales of over Stg £490 billion over the past four years. That is about one third higher than the previous peak between 2004 and 2007. The analysis also found prices being paid for assets sold averaged £254 million per deal compared to £151 million from 2004 to 2007.
Higher sales are occurring at the same time that PE firms are raising record sums of money which analysts say, is being driven by institutional investors seeking a higher return on their funds in a low interest world; wariness about alternative investments such as hedge funds and the lack of credit to businesses.