Have deal certainty? Sold!

At PEI's recent Operating Partners Forum, executives from firms including Permira and Antin Infrastructure said sellers are primarily driven by the ability of the buyer to execute on a difficult transaction.

Deal strategy and execution tops price in most corporate carve-out situations, operating partners said at a recent Private Equity International event.

Private equity firms may not always provide the highest price, but the ability and agility to execute is now a primary consideration for most sellers, noted panellists at the Operating Partners Forum: Europe 2021 in London last week.

“In private equity, once you have the backing of your investment committee… you can be pretty aggressive in executing and navigating through complexity,” said Filippo Pozzi, an investment director at Antin Infrastructure Partners. “Risk and complexity might scare a corporate buyer. In our case, complexity is what we love. Scary situations and operational complexity give us more chance to make good investment returns.”

Riccardo Basile, a principal at Permira Advisers, noted during the panel that some key things to watch out for when executing carve-outs include the company’s cashflow, existing contracts and value leakage.

“Carve-outs can be complicated and can be very painful especially if not well planned by the seller and therefore key for me is looking at the cashflow of the business – that’s one thing that shouldn’t lie,” Basile said.

Permira in 2015 acquired Magento Commerce, a division from eBay, which generated a 6x return for the firm and its investors in three years, Basile said.

There isn’t necessarily a difference in how PE firms structure their value-creation plans between a carve-out or a family business, noted Victor Vadaneaux, an operating partner and adviser to firms including Cairngorm Capital, Oakley Capital and ICG.

The key issue is developing the investment thesis early on, he said. “[It’s] thinking about, ‘How are you going to make money in this deal? How are you going to improve the business along a range of dimensions and not just EBITDA? How can you put ESG and digitisation at the core?’”

About two-thirds of respondents in Dechert’s 2022 Global Private Equity Outlook report said they are considering carve-outs of orphan or non-core divisions from corporate sellers over the next 12-18 months. In addition, 58 percent of North American respondents expect the number of carve-outs targeted by their firm to increase over the next year-and-a-half.

The first nine months of 2021 already had $378.3 billion in carve-outs globally – higher than the $348 billion registered for the whole of 2020, according to the report.

Recent carve-outs in Europe include Viridor Waste Management, which KKR and Hermes GPE bought from Pennon for £4.2 billion ($5.6 billion; €5 billion); the professional and retail hair business of cosmetics maker Coty, which KKR acquired for $2.5 billion; and more recently CVC Capital Partners’ €4.5 billion takeover of Unilever’s tea business ekaterra.