Heard several times now that HIG has creative structures and the results speak for themselves at 4.7x gross realized across exits.
I‘d love to learn more about tangible examples. Are we talking liq & participating prefs, ops / excess cash splits in the bridge, ISO multiples, specific earn outs, MIPs, anything else?
Would appreciate learning more and hear a deal example. Thank you!
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I don't know if they do anything special in terms of structure vs any other value PE firm. Just think of all the typical heads I win, tails you lose structures that pass risk off to the sellers and mgmt - i.e. earnouts, seller rollover, MIPs with high performance hurdles, preferred shares, opportunistic div recaps etc.
I think what they do well is hang around the hoop, lowball, and negotiate and retrade without any remorse. They will squeeze every last dollar out of the clearing price for an asset - they are excellent at this and frankly the results speak for themselves.
How are they able to do this lowball in a mature and saturated PE industry?
By going after processes that are broken and / or hairy deals that others don't want to generally touch (e.g. weak management team, failing to meet budget, poor data, etc.)
Agree with the other poster on all points raised. They are willing to throw bids at any opportunity that comes their way and just wait around to see if there is a chance that they can come in at a cheap price. It's a volume shop where they are willing to process an NDA on anything that comes in. Their bids aren't ever compelling and they know that. When a banker invites them to the second round with a bid that they know is low, they see an opportunity to buy an asset at a low price or eventual broken process. It's really then that they sharpen their pencils. They won't ever pay a premium price for an asset and since there are always companies that have some motive to sell even at a bad price, they continue to find new investments.
Given their returns, why aren't they seeing more competition from other funds doing the same?
Super interesting, thanks for the insights and makes sense. What are valuations they are typically enter at and do they strictly look at companies that are operating in stable / positive EBITDA margin territory or would they also do turnaround transactions?
In terms of squeezing out every last dollar of a clearing price, it would be helpful to understand how they typically play a round 1 NBO vs. round 2 and how much they chip at the price in-between. Any examples there?
To contribute myself, I've seen two angles to this from different value-oriented PEs. The "bilateral" shops really focus on getting bilateral, true off-market deals with no bidding competition (but then won't massively retrade / chip prices during the negotiations as the seller will simply walk away) and the "chippers" will come in with a seemingly OK EV and then just trade down across each round of negotiations and profit as other bidders have dropped out and ramped down in the meantime.
Valuation would depend on the industry but would say they are typically submitting bids a couple turns below the industry comps in the space. They know that in a healthy process that they won't get the call back to advance. But if they do get a call back to advance, they know they may be a part of an eventual broken process and will start to think about whether they want to do the deal.
I'm not too familiar with all of the HIG funds but they have multiple PE funds so maybe the turnaround transaction would fit in one of them. The Advantage fund is supposedly their higher quality fund but overall given their rep I don't think many people are looking at HIG to be a quality buyer who will pay you what you are really worth.
Sold two companies to HIG from around 2018/2019 and had them in dozens of processes up to 2021 when I quit banking. Bids were routinely 40-50% lower than the highest bid amongst NBOs. Guys I knew there viewed the low bids as a form of derisking transactions. Less downside if you buy industrials at 6x rather than 10x, and upside from multiple expansion is obviously greater. You can also get away with more leverage, which boosts IRR/MOIC. Too many PEs are afraid to say the biggest driver of PE performance in general is the entry multiple.
In my experience HIG is not materially worse than other PE MIPs. It is a small part of the total gain, and you still need management motivated to do the dirty work. In terms of LP returns, it barely moves the needle, even if you screw your entire mgmt team.
How are they able to win when they lowball in competitive processes, unless they're bilateral?
And banks allow them to proceed as the lowest bidder, besides entry multiple what types of businesses are they focused on - are they out of favor flatlining businesses, or potential distressed situations or declining businesses?
it's called stink bidding
100% true. There is also on the high IQ side, say that you’re doing the middle thing but actually just target lower overall returns while still barely clearing hurdle on a net basis and split 2% of your now ludicrous fund size among like eight dudes (LGP, Veritas, GTCR, HF somewhat)
Let’s see what happens in the latest fund but all the names above have actually crushed DPI historically so…
I know for a fact that HIG looks at dogshit businesses where management teams say "hey we're turning this around and it's going to be killer numbers, look at these numbers" and HIG says "ok fine you actually believe those numbers?" and management says "yes" and then HIG says "ok well we'll give you earn outs on all those numbers but the base transaction is for the dogshit company so heads I win tails you lose" and management has to save face by pretending the numbers they just give aren't bullshit (they are) and says OK fine we'll take the earn outs. And the platform is actually dogshit and HIG is just good at underwriting the dogshit.
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