When you're selling to a company that is a portfolio company of a PE firm, are you selling to a sponsor or a strategic?
So, if the company you're advising is being sold to a company that is a portfolio company of a PE firm, which perspective do you approach it from? Are you looking to do an LBO for modeling or a DCF or what? Should you approach the buyer as a strategic or as a sponsor? Or is it not a black/white situation like that?
Also, if a company is owned by a PE firm, is that what is meant by the 'PortCo' term I hear thrown around a lot here?
You are selling to a sponsor, not strategic
So in this case, LBOs are commonly used, and you mainly look at the IRR multiples?
Yes, you use both. DCF tells you about the value of the company. LBOs tells you about how much a PE firm is able to pay to achieve set targeted returns and hence also metrics like IRRs, Cash on Cash etc are used
It’s the same process that they do when they have to evaluate whether to acquire a company to add into the portfolio. It does not matter if it’s an add on (of course in this case some assumptions and considerations will change and will have to take into considerations, like synergies etc)
Disagree with above - your approach would be more similar to a strategic than a new investment for a private equity firm. "Sponsor-backed strategic" is the usual term. As a banker, you can't run the same lbo analysis as you would if you were to sell standalone to a private equity firm because you have no idea what the capitalization of the existing company is, the terms and performance of prior acquisitions, potential revenue and cost synergies, timeline to exit the investment, and other items that directly impact the ultimate sponsor's returns.
If it's a big enough company, you may not have much dialogue with the backing private equity firm. If it's smaller, the PE firm may run M&A completely.
Yes, a "portco" is a portfolio company (investment) of a private equity firm.
Hmm... interesting points. So you mean that because you don't know what the capitalization of the platform company is, as well as the possible performance of prior acquisitions, and the timeline to even sell the add-on, you cannot run an LBO analysis?
Correct me if I'm wrong, but understanding the platform's capitalization is important because you want to see whether the company is able to handle the debt that comes with a leveraged buyout?
Also, for MM funds, the PE firm is more likely to run the M&A, but that's less likely for larger companies? Why is that? And why would you not know the terms and performance of prior acquisitions?
Ik this is a lot, but if you could help me out with any of these questions, would really appreciate it!
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