Every private equity firm has a different way of approaching value creation, and each portfolio company has a unique set of challenges. But there are some common threads that weave through strong examples of operational excellence.
Our regular Deal Mechanic feature in Private Equity International goes under the bonnet of a recent deal to find how ope-rating partners have added value to their portfolio companies.
Here are a few things we’ve learned from the last 12 months of examining the art of adding value to secure a successful exit.
1- FINANCIAL RESTRUCTURING
Several of the portfolio companies featured in PEI’s Deal Mechanic pages in the last year were acquired pre-2008, when buyout houses were routinely saddling businesses with aggressive capital structures. Those that ultimately pulled off strong exits addressed the challenges that ensued head-on.
Permira began the process of acquiring Valentino Fashion Group and Hugo Boss in May 2007, paying a combined €5.3 billion, which included debt of 8x EBITDA. As the global financial crisis took hold the firm took a close look at all the financing structures it had in place, and in 2009 took the opportunity to negotiate with lender Citigroup to buy back a third of its debt at a 62 percent discount. On a much more stable footing, Permira could then re-discuss with its lenders the terms of the remaining debt so all parties were more comfortable. Terra Firma acquired German motorway service area business Tank & Rast in 2004, and in 2007 sold 50 percent to RREEF Infrastructure, part of Deutsche Asset & Wealth Management.
It then put in what the firm described as a “pre-crisis 2007 legacy capital structure” which included “quite a bit of leverage, quite a bit of debt quantum, and a so-called bullet maturity, which were to mature in 2014”.
In 2011 Tank & Rast was still doing well operationally, but if the debt were to mature at that moment, Terra Firma would have been unable to refinance it. The firm immediately began exploring refinancing avenues, eventually completing a €2.1 billion refinancing in December 2013, lowering the cost of the debt and introducing longer-dated facilities with staggered maturities. In one step, risk was alleviated and a significant uplift in valuation followed.
2- STRENGTHENING MANAGEMENT
Firms will often say that getting the right management team in place was the single most important thing they did to improve the performance of their portfolio companies. In some cases, GPs have to start from scratch, building out a full management team. Such was the case with Apotek Hjartat, the Swedish pharmacy chain acquired by Altor Equity Partners in 2009 when the Swedish government deregulated the pharmacy sector. Following a complex transaction Altor was left with just the stores – no management.
Altor brought together a team of three Norwegians, who had held operating and board roles within the Norwegian pharmacy market, which had also been through deregulation, and the former deputy chief executive of Swedish grocery retail firm ICA to create a central management team.
ECI Partners also called on its little black book of contacts when it acquired employment law and health and safety solutions business Citation in 2012. As part of the transaction, the CEO, a major shareholder, left the business, which left a significant hole to be filled.
ECI called on Chris Morris, at the time chief financial officer at former ECI portfolio company LateRooms.com, to fill the void. Together with Morris the firm then brought on a new board chairman and crea-ted several new roles: sales and marketing director, chief technology officer and HR manager.
3- ADD-ON ACQUISITIONS
While organic growth is a key part of most portfolio companies’ value creation plans, pursuing a bold buy and build strategy is an effective way to turbo-charge expansion plans.
Palamon Capital Partners portfolio company Towry, a wealth manager, completed 16 add-on acquisitions during the firm’s 13-year hold period.
“[We] developed a very well-honed integration machine,” Palamon partner Daan Knottenbelt told PEI.
“We had a very extensive training programme to teach the advisors who were used to selling their model to adopt the Towry financial planning and client fee-based model [and] we outsourced all the operations and administration to an external, very large global administrator business called SEI. That gave us the scalability.”
Emergency notifications business ECN, which was sold by The Riverside Company in June 2015, completed six add-ons during Riverside’s ownership, buying up direct competitors in different parts of the US, and consolidating revenues and customer bases. Media and exhibitions company CloserStill also completed six bolt-ons under Phoenix Equity Partners’ ownership, allowing the company to expand both within the UK and internationally within sectors it already knew well.
4- THE BENEFITS OF INNOVATION
Among the many benefits that come with private equity investment, one that is often key to the successful growth of small and medium enterprises is the provision of not just the capital required but the headspace necessary for the mana-gement team to continue innovating and developing new product lines and services.
During Permira’s four-year ownership of Intelligrated, a business combining software and technology to sort and distribute packages for retailers and manufacturers, the firm helped the company develop new automation systems and a new parcel product. The company now has a pipeline of products in development which it anticipates will bring in $4 billion in additional revenues.
By selling off the non-core businesses Mayborn Group owned on acquisition and focusing all the attention on baby products brand Tommee Tippee, 3i enabled the highly innovative team to focus its energies on baby feeding products and accelerate past the competition. The most critical innovation came in 2007 when Tommee Tippee introduced the Closer to Nature bottle, which is designed to mimic breast feeding.
5- INTERNATIONAL EXPANSION
Many portfolio companies have dreams of taking their product or service into new geographies; investment from private equity firm can give them both the capital and the confidence to do so.
A key priority for The Abraaj Group when it acquired Peruvian women’s accessories retailer Iasacorp in 2009 was to turn the business into a regional champion. Iasacorp already had a strong presence in both Peru and Chile, but with Abraaj’s help the business expanded into Colombia and Mexico, and signed franchise agreements in Venezuela, Ecuador, Bolivia and Central America. During Abraaj’s five-year hold period, points of sale increased from around 120 to more than 480.
3i used the success of Tommee Tippee on the UK store shelves of ASDA and Babies R Us as a lever to launch stateside in their US counterparts. 3i agreed an exclusive launch in Babies R Us in the US and quickly became one of the store’s fastest-growing brands in the baby products market.
This was followed by agreements with Target and, in 2015, with Walmart, when Tommee Tippee was launched in around 1,800 of its stores. Today, Tommee Tippee is one of the leading baby products brands in the US with more than $40 million of annual revenues.