Private Equity Portfolio companies

5ways2doit's picture
Rank: Baboon | 125

I have searched pretty extensively here and throughout search engines as to how private equity companies go about finding companies they want to buy,invest, or restructure. I understand the strategy(unfamiliar with the term) where you purchase a publicly traded company, take it private, then either sell or have another IPO. What is the process that private equity firms take in order to find private companies to invest in or purchase? Do companies come approach the firms or do the firms approach a company with a purchase offer?

Also a side question, how can one practice making case studies, would you use publicly traded companies as an example or other means?

Sorry for not being able to use industry lingo. Thank you for all responses.

Comments (22)

Best Response
Apr 29, 2014

A high level perspective...

Medium to large size companies are generally brokered and represented by investment banks. Investment banks leverage their relationships and rolodex to match potential targets and financial sponsors (PE shops) or strategics (other companies in the same industry). For example, a banker will send me an email with a "teaser", a 1 pager outlining the details of a prospective target (on a no names basis - usually with a project name like "Project Can you Be any more Unoriginal"). If the opportunity matches my investment mandate and I want to learn more I would sign a confidentiality agreement (CA/NDA) and the banker would provide me with a confidential information memorandum (CIM/OM). That is how most deals are passively sourced. The goal of a PE shop is to remain on the bank's radar so as to have an early look at all deals that meet their parameters.

Active sourcing is much different (and admittedly I have much less experience with this type) and can be highly diverse/creative. Most ideas will come out of trade journals, regional business magazines, 3rd party brokers, and others in your network (lawyers, consultants, etc.). You can also pay for services that provide leads which entail warm/cold calling, which I would imagine to be pretty miserable and ineffective (although it is a numbers game like anything else).

Companies looking to raise capital, succession plan, etc. will also occasionally reach out to PE firms directly. My only experience with this was a strategic reaching out to the CEO of one of our portfolio companies and then our PE team taking it from there.

You should be able to find case studies on this site, through Google, or on M&I (a competitor to this site). Various modelling courses (BIWS, WSP, etc.) also outline how to create a case. Your best bet is to use Edgar (sec.gov) for public financials. The general presentation outline would be investment thesis, company overview, competitive threats, risks, financial projections, projected returns, etc. Anyway, this was a quick unorganized response but definitely keep using the search function. If you have any specific questions feel free to ask.

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Apr 29, 2014

-Thank You for the response-

Once the fund sources the deal through the different ways you laid out. There must be stiff competition for the deals that seem to be a profitable venture. For example, if an investment bank sends you a teaser (assuming you aren't the only firm in on the deal) and it fits your investment mandate, what is the process of your firm closing the deal over another firm(s) that is interested?

You also mentioned how companies looking to raise capital, succession plan, ect. will occasionally reach out to the firms directly; these types of deals must come from pure relationships I am assuming?

Apr 29, 2014
5ways2doit:

-Thank You for the response-

Once the fund sources the deal through the different ways you laid out. There must be stiff competition for the deals that seem to be a profitable venture. For example, if an investment bank sends you a teaser (assuming you aren't the only firm in on the deal) and it fits your investment mandate, what is the process of your firm closing the deal over another firm(s) that is interested?

You also mentioned how companies looking to raise capital, succession plan, ect. will occasionally reach out to the firms directly; these types of deals must come from pure relationships I am assuming?

Banks run a deal process that typically involves working with the seller to prepare a confidential information memorandum (CIM), that essentially describes the company, market, customers, financials, etc. They will then contact people they think would be interested in the deal, and anyone interested signs NDA's and receives the CIM. Everyone interested in the company submits an indication of interest (IOI) letter, which is structured and provides information requested by the bank, including purchase price, deal structure, why it would be a good fit, etc. The bank then takes all IOI's and works with the seller to determine the next step - sometimes someone's offer is so high they just rule everyone else out and negotiate the sale with that buyer.

Other times some or none are ruled out by the bank and seller. Bank meetings are set up where the seller and bank put together a pitch to potential buyers, providing more information and giving them the opportunity to meet management and tour the facilities (sometimes).

Those still interested submit an LOI. The bank/seller choose who to pursue the sale process with and go from there. Due diligence from the buyer commences, etc. Through this process people drop out.

My firm has a passive deal flow and has sourced almost all of our deals through working directly with owners/managers. We've only done one bank sponsored deal so far, actually, though we look at a lot of them. We have extensive personal networks in the region and provide a unique service for a private equity firm, which is that we work more closely with management in owner/management transition periods (most of our deals fall into this category) and provide longer term guidance on giving them tools and advice to help them grow the business. People know we are good at this, and they are willing to accept a lower sale price to work with us. Our last deal rejected bank sponsorship, instead preferring to work directly with us through the sale even though they knew they could have got (probably) quite a bit more money in an auction. The owner knew of us via our connections, and knew we would help him transition out and work with his successor to bring him up to speed, provide guidance, provide patient capital and work with him to keep the business improving while he learned.

I seem to fit the bill of the types of questions you're asking so let me know if you have any other questions.

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May 1, 2014

no experience in PE so can't comment on current practice. if I were going about it, I would look at the major industries in my area, see what their trade organizations are (e.g. American Commercial Fishing Cooperative, I made that up FYI), and see who the major players are. if it's not dominated by public companies (railroads, airlines, credit cards), you should get some ideas from there, though that involves more time & effort. alternatively, you could look at an industry level and see where you want to try to expand. keeping with the fishing example, I'd look for trade associations in WA, AK, MA, ME, etc. and do the same thing as above. also, the business journals company puts out great newsletters, you could subscribe to ones all over the country, get weekly/daily updates and see what companies are making moves/getting into trouble (depending on what your fund goes after).

May 4, 2014

At my MM PE shops, we generally had each associate on 2-3 portfolio companies and no more than 1 post-LOI deal at a time. Typical team size was 3 - 5 people. Only 1 pre-MBA per deal.

May 4, 2014

TPG hired a friend of mine and he said most of his experience was working for one of their portfolio companies (J Crew I think) in a customer-facing role in one of their stores. Seemed like good operating experience, and he was paid based on commission which was nice, so he had a lot of upside. Lots of interaction with the store manager and floor managers too which was pretty cool. He also got discounts on their clothes.

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May 4, 2014
firefighter:

TPG hired a friend of mine and he said most of his experience was working for one of their portfolio companies (J Crew I think) in a customer-facing role in one of their stores. Seemed like good operating experience, and he was paid based on commission which was nice, so he had a lot of upside. Lots of interaction with the store manager and floor managers too which was pretty cool. He also got discounts on their clothes.

You need a class on humor. This isn't even remotely funny.

May 2, 2014

One of the downsides to private equity, that is rarely mentioned on this site, is the fact that when you are bidding on large transactions you often lose, which is true for even the biggest and best players. As we competed against funds with much deeper pockets (Bain, BX, etc.) and deal teams it was definitely a struggle. This can become incredibly frustrating and even demoralizing over time considering you can spend a few months on pre-acquisition due diligence and end up with nothing to show for it (except for experience, industry knowledge and deeper relationships - all valuable). Not to mention that the PE transaction process can become very monotonous and arduous. Reviewing CIMs, data rooms, building models, talking to management, etc. all day can be exciting but over time it can also become a grind. Plenty of positives but just to shed some light on some of the negative aspects.

Having also dabbled in the growth equity space I would say that the biggest downside is that when dealing with smaller companies you get stuck dealing with companies that are less sophisticated / "unprofessionalized", which is where you can really add value by coming in to fix the capital stack, streamlining operations, and providing the necessary capital to reach the next phase of growth.

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May 4, 2014

There's usually somewhat of a disconnect between the PE guys and the portfolio company guys.

The portfolio company guys are usually state school educated, possibly blue collar, very entrepeneurial types. This is especially the case if they founded the company and continue to run it after the buyout. If you're the son of one of these guys, and you went to a state school, are trying to break into PE but aren't qualified to do so otherwise -- this connection will not serve you very well.

The opposite end of portfolio company guys are the ones that PE firms bring in. Often times, the selling management team gets kicked out after a buyout and the PE firm brings on its "own guys". These are generally their classmates from HBS/Stanford or general managers from places like GE, Danaher, etc. Otherwise, top notch executives. If you're the son of one of these guys, and you went to a top undergrad -- the network will probably serve you well.

Basically, the question you have to ask yourself is: Are you qualified for PE without this introduction? If the answer is yes, then it'll help. If you're not, then the answer is likely no.

May 4, 2014

I'd say I'm just as qualified as any other kid trying to break into PE (or I will be when my two years are up). I went to a top LAC, started as an IB analyst at a well-known MM a few months ago, and the connection (portfolio company executive) is the type of guy a PE company would generally bring in. He was there when the PE company initially invested, but they kept him there for a reason. The fund has also been invested in this company for a few years now, so I would assume the relationship has strengthened over time (considering they're both still there). The guy also has an MBA from a top 10 business program - not H/S/W, but reputable nonetheless.

Thanks for your insight though - definitely a good way to approach the thought-process there.

May 4, 2014
jimbrowngoU:

I'd say I'm just as qualified as any other kid trying to break into PE (or I will be when my two years are up). I went to a top LAC, started as an IB analyst at a well-known MM a few months ago, and the connection (portfolio company executive) is the type of guy a PE company would generally bring in. He was there when the PE company initially invested, but they kept him there for a reason. The fund has also been invested in this company for a few years now, so I would assume the relationship has strengthened over time (considering they're both still there). The guy also has an MBA from a top 10 business program - not H/S/W, but reputable nonetheless.

Thanks for your insight though - definitely a good way to approach the thought-process there.

Sounds like you're good to go -- go for it.

May 4, 2014

I'm sure experiences will differ, but I assist our portfolio companies with various items, albeit more macro in nature. Everything from keeping track of what the competition is doing to helping the company find a new CFO. Most recent items include setting up an international JV and evaluating potential acquisitions.

But again, depending on the type of investment, the porfolio company should be handling most of this themselves with input from the PE firm. The experience is valuable, but I wouldn't want to focus on it on a daily basis. Again, experiences/opinions will differ.

May 4, 2014

"Assisting Portfolio companies" can mean a range of things. Helping them develop their business plan or financial projections, helping them with presentations to the banks if you are doing a recapitalization or sale or co-investment, searching for new talent, issuing more options, etc.

Internally at the PE firm, an associate is also usually responsible for keeping track of performance and putting together some sort of quarterly status report on various portfolio companies.

May 4, 2014

Thanks for the responses guys.

May 4, 2014

Hey guys,

At my firm (~750M) a couple of companies in our funds are getting into cash flow trouble and my firm is taking a more active role in its involvement with bringing about solutions. One analyst built out a cash flow model and has worked on financing presentations and marketing initiatives. I was assigned to a portfolio company with slightly larger issues (turnaround / startup) and have aided in building a budget (including focusing on the quality of sales projections with product reductions / price increases, modeling labor reductions, re-structuring their P&L, and improving the documentation that forms the basis for expenses) as well as improving other tracking processes with respect to sales (made and projected).

Hope this helps.

May 4, 2014
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