impact of on portco from different entry points by PE firms
Im looking at a role in a portco which was bought by a PE firm from another PE firm less than a decade ago. towards the end of the investment lifecycle period (4-6 years), rather than doing a full exit, due to market conditions, the PE firm sold a minority stake to another PE firm. What is the impact of such a situation on the overall strategy for the PortCo usually? i assume the original firm would want to exit as soon as the market recovers (as it will soon be nearly a decade since original investment) but would this always align with the objectives of the second investor? Presumably, if they sold after only 2-3 years they would have issues redeploying the capital before their fund expired. If there is a conflict, what kind of impact could this have on the people at the portco level? any red flags to look out for? Apologies if silly question, not from investing background and haven't worked at PE backed firms before.
Many thanks in advance
When a PE firm sells a minority stake in a PortCo to another PE firm towards the end of its investment lifecycle, several strategic implications can arise for the PortCo, influenced by the differing objectives of the two PE firms involved:
Investment Lifecycle and Exit Strategy: The original PE firm, nearing the end of its typical investment period (often around 10 years), is likely motivated to exit to realize returns and distribute capital back to its investors. This firm might be looking for favorable market conditions to sell its remaining stake at a profit. In contrast, the new PE firm, having acquired a minority stake later in the lifecycle, might have a different timeline and strategy. They could be interested in holding their investment longer to implement growth strategies or improvements, aiming for a higher return when market conditions are more favorable.
Strategic Alignment and Conflicts: There can be potential conflicts between the two PE firms regarding the timing and manner of exit strategies. The original firm might prefer a quicker exit to close out the fund, while the new investor might push for initiatives that require a longer timeframe to increase value. Such strategic misalignments can lead to disagreements on the board level regarding the direction and management decisions of the PortCo.
Impact on PortCo Operations and Management: For the management and employees at the PortCo, these differing investor objectives can translate into varying degrees of strategic focus, investment in operations, and possibly changes in senior management if new directives are pushed by the new PE firm. This could lead to periods of instability or shifts in company culture and operational priorities.
Red Flags to Look Out For:
Understanding these dynamics is crucial when considering a role in such a PortCo, as they can significantly influence the company's environment and your potential role within it. Being aware of the investors' timelines and objectives can provide insights into the company's future challenges and opportunities.
Sources: Random Things I Wished I Knew About PE, Reinvesting in a PortCo After Previously Exiting, Exit as a VP because lost interest, https://www.wallstreetoasis.com/forum/private-equity/why-i-left-pe-switched-to-the-public-markets?customgpt=1, Why I Left PE & Switched to the Public Markets
thanks Bot. surprisingly helpful answer in the absence of real people answering.
id argue that #1 however is simply a repeat of my question, but I suppose for purposes of an interview, points 2-4 are interesting questions to ask. the strategic direction focus is what I thought would be the case.
articles linked also interesting.
Check if it was the same fund. Sometimes when they sell a stake they’ll sell the stake at the same valuation from colour [Nature] Capital Partners I to colour [Nature] Capital Partners II. The stake selling is more to ensure a third part assessment of fair value as they will likely have slightly different LP mixes between different funds. As you’ve correctly identified there’s a whole world of difference between a 10 year investment and a more recent one. Good luck!
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