The ultimate deal mechanic

When it comes to value creation at portfolio companies, it’s clear there is no “one-size-fits-all” approach. But if you look at strong examples of operational excellence, you’ll see there are a few things they have in common.

Our regular Deal Mechanic feature in Private Equity International goes under the bonnet of a recent deal to find how operating 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. Do the right deal in the first place
This may sound like private equity 101, but doing the right deal for a particular portfolio company can be easier said than done.

For Epiris, the right solution with Park Resorts – later renamed Parkdean Resorts – was to buy a series of debt tranches which eventually gave the firm a blocking minority and the ability to work with the private equity investor, management team and banks on a consensual restructuring.

“Essentially that involved extending the maturing of the debt, converting a piece of our debt into a PIK instrument and, crucially, us getting equity control of the business,” managing partner Alex Fortescue told PEI.

Sometimes a deal outside of a GP’s usual “playbook” can lead to positive results. Mortgage broker Meilleurtaux was not a typical investment for Equistone Partners Europe: in 2012 when HSBC was selling the business for French bank BCPE, it was loss-making, and the business was only just breaking even when the deal completed in 2013.

But three key elements – the strength of the management team, the market opportunity, and the strength of the brand name – persuaded the firm it was a good investment.

“We were convinced there was a great potential for this business in France,” Equistone managing partner Guillaume Jacqueau told PEI.

In December we featured Coller Capital’s restructuring of Irving Place Capital Partners Fund III, a fund which straddled the global financial crisis and was left with a split portfolio: pre-crisis investments, which still needed time before they could be optimised and sold; and post-crisis ones, which were faring better but hadn’t had enough time to mature.

During the process, Coller quickly emerged as the buyer of choice, thanks to its willingness to “pay the fairest and highest price” and to “provide a flexible and smart approach to the structuring”, IPC’s co-managing partner John Howard said. When the deal closed in July 2015, 90 percent of LPs voted in favour and 35 percent rolled into the new vehicle.

2. Get the right team in place
The first thing on EQT’s to-do list after the acquisition of business process automation company UC4 – which it later rebranded Automic – was to put together a new board of relevant people for the various work streams and value-creation opportunities the firm had identified.

EQT brought in former QlikTech chairman and CEO Mans Hultman for his knowledge on sales force effectiveness and former Microsoft Sweden head Jonas Persson for his product know-how and to focus on research and development. Vagn Sorensen, who had chaired several EQT portfolio companies, came in as chairman to drive the firm’s industrial agenda and operational improvement programme. EQT also brought in a new CEO, Todd DeLaughter, and a new chief sales officer and chief marketing officer to implement the outlined value creation plan.

When General Atlantic was gearing up to acquire two retail options-trading companies, OptionsHouse and tradeMONSTER, it turned to an old acquaintance. It enrolled Mike Curcio – who had led the brokerage at E*Trade Financial, in which General Atlantic had been an early investor – as a consultant before the acquisition was completed, with a brief to become familiar with the management teams and help develop a strategic plan. He later became chief executive of the combined company.

3. Roll up! Roll up!
Without a doubt, M&A – whether it be one giant merger or tens of smaller add-ons – is the value creation lever you will read about most often in the pages of Deal Mechanic.

“The transformational add-on acquisition of Orsyp helped us achieve a completely different level of scale and profitability compared to when EQT entered the company”
Per Franzen

 

For EQT and Automic, it was the add-on of Paris-based Orsyp, an IT automation and optimisation solutions business. Focused on France and with a good market position in Canada, Orsyp was geographically complementary to Austria-based UC4.

“The transformational add-on acquisition of Orsyp helped us achieve a completely different level of scale and profitability compared to when EQT entered the company,” Per Franzen, a partner at EQT, told PEI.

The integration of Orsyp brought substantial synergies and improved the company’s margins from 23 percent to 32 percent.

A large part of the value creation plan for Epiris at Park Resorts was add-ons. First came South Lakeland Park, held by Irish bank NAMA. This was swiftly followed by a pair of parks, Southview and Manor Park, also from NAMA.

The final piece was the merger with Alchemy Partners-owned Parkdean Holidays, which was not only geographically complementary but also “stronger on the holidays side of the business, selling caravans for rental for a week or four days, whereas Park Resorts was much better at the sales side, selling a caravan outright and then renting a pitch by the year,” Fortescue said. Following the merger, the combined business was renamed Parkdean Resorts.

4. Broaden the scope
These add-on acquisitions are often the perfect tool for companies that are looking to broaden their product offerings. Such was the case for language services and technology company Appen, which completed three acquisitions under Sydney-based Anacacia Capital’s ownership.

“The idea was to make Meilleurtaux a kind of financial services supermarket with a lot of new products and services”
Guillaume Jacqueau

The first, US-based content relevance business Butler Hill, helped diversify the company’s product and service offerings, increase customer touch points and expand its geographic footprint.

The second, social media business Wikman Remer, allowed Appen’s commercial clients to localise their search engines and improve internal website search functions. In September 2016, the company acquired Mendip Media Group, a UK-based provider of secure transcription services. This enhanced Appen’s security language service solutions to reach government services and to expand further into the UK and Europe.

During Equistone’s ownership, Meilleurtaux diversified from its original remit of selling just mortgages and loan insurance, and began to offer debt consolidation, consumer loans, bank accounts, general insurance and loans for small and medium-sized enterprises.

“The idea was to make Meilleurtaux a kind of financial services supermarket with a lot of new products and services,” Jacqueau said.

When EQT rebranded the freshly-merged UC4 and Orsyp as Automic, it took the opportunity to reposition the business to a broader, more high-level customer set. The idea was to take a previously IT-centric business that sold its products primarily to IT specialists within companies to automate certain processes such as invoicing systems and turn it into a business process automation company that could help its clients with more complex processes such as, for example, customer on-boarding at a telecoms business.

5. Secure the right exit
One thing we always ask firms when we interview them for Deal Mechanic is how they knew it was the right time to exit a business. Timing the exit perfectly is crucial for securing a strong return.

EQT – which had been approached on several occasions with expressions of interest in Automic, particularly from strategic buyers – set a “clear minimum value target under which EQT was not prepared to sell”. That led to a limited process which ran in the second half of 2016 and resulted in CA Technologies agreeing to acquire Automic in a deal valuing the business at €600 million.

Because it manages separate accounts, General Atlantic can hold investments for longer than the industry average, which makes the sale of OptionsHouse to E*Trade after just two years unusual for the firm.

“Some of that had to do with achieving the operational milestones we were looking to achieve more swiftly than we originally anticipated,” Paul Stamas, a principal in the firm’s New York office told PEI.

“We were in a position where the right next step for the company was in fact a sale to a strategic like E*Trade. This investment period was atypical for us, but the stars aligned for a deal with E*Trade sooner than anyone could have initially anticipated.”

A source with knowledge of the transaction said General Atlantic generated a gross internal rate of return above 60 percent.

Warburg Pincus did a re-IPO – a recapitalisation through the placement of new and existing shares – for NASDAQ-listed plasma-based pharma company China Biologic in 2015, raising more than $200 million. Through this the firm introduced the opportunity to institutional investors in the US and attracted big names such as Capital World Investors and Fidelity Investments.

“These companies came in as very important investors and further diversified the investor base of China Biologic, making it a truly public company,” Warburg Pincus managing director Min Fang said.

“Previously the company had no research coverage, no liquidity, but after the re-IPO in 2015, it got research coverage by all the major banks such as Morgan Stanley, Merrill Lynch and Credit Suisse, thus improving its liquidity from almost zero to nearly 10 million a day.”

By the end of 2015, the company had a market value of more than $3.7 billion. Warburg Pincus sold down its stake over time and fully exited the company in August 2016, generating a return of 7x and an IRR of up to 60 percent.