Value of bankers on buyside transactions

I'm curious to gain some insight from the PE Investment professionals on here how bankers have added value when hired to advise on the buyside. My understanding was that advisory roles on the buyside for PE shops were usually nominal and a "reward" for also providing favorable financing. If not, it was a "finders fee" role for bringing the deal to them or arranging some special angle i.e. bringing a deal partner, etc. (the only way boutiques would ever get these roles as they don't offer financing).

This was prompted by both Evercore and Valence advising Carlyle on its EUR $10.1 billion recent acquisition of Akzo Nobel's Specialty Chemical business with Government of Singapore Investment Corporation. Now, obviously I don't know what kind of fee they received but, it was likely substantial. This was a broad auction process where Carlyle is an obvious addition to the buyers list. Carlyle has experience in chemicals having bought Axalta out of Dupont in 2012. GIC was more than likely a Carlyle LP as opposed to a relationship facilitated by a banker. I can't figure out what value these guys would have added to justify their roles.

For those of you on the buyside, when you do use advisors when buying a business, what role do they actually play?

Comments (19)

 
Mar 29, 2018 - 3:03pm

Really only helpful on international markets...for example we helped a UK pe shop buy a US company once. They did not have a good understanding of US M&A and wanted us to help them through process and typical legal/auction process.

Can also be helpful if a bank has a particularly good relationship with the management other than the selling advisor.

  • 1
 
Mar 29, 2018 - 3:12pm

Considering how lean PE firms are usually run, the IB is often used to take care of more mundane tasks like working group lists, writing some parts of investment recommendations, partly coordinating advisors, summarizing reports, taking notes etc. Additionally, they often also create the operating model, at least from my experience in European PE. Senior bankers often advise on pricing, tactics etc.

 
Mar 29, 2018 - 3:19pm

In my mind those activities are what PE juniors are for but I guess in a lean firm, some of it could be outsourced. As far as advising on pricing, tactics etc.....how seriously can PE principles really take this advice? Bankers are incentivized to get the deal done as opposed to objectively evaluating its merits. I have a hard time believing that this doesn't play into their recommendations at all...

 
Mar 29, 2018 - 3:35pm

My experience comes from deal teams of 2 or 3 people from the PE fund's side (Partner, Director, Associates), so there I have definitely seen this kind of work outsourced.The Associate does most of the coordination work and is responsible for the investment recommendation.

You are obviously right on the incentive perspective, obviously, the bankers always want the PE to bid a higher price but as mentioned above they can still provide advice on structuring etc. and I have also seen the PE partners take the advice on pricing seriously if there was a long relationship.

 
Apr 2, 2018 - 8:19pm

Like the responses below - small deal teams on big deals can leverage bankers for some of the work (precedents & comps research, financing if the bank is involved, organizational stuff, etc).

But also, PE firms use buyside / sellside fees as a way to reward banks that have brought them the best opportunities. They also know that banks value league table credit, so that is a consideration in a big transaction like this.

 
Apr 3, 2018 - 2:01pm

What does "best opportunities" really mean? Does that mean getting the PE shop in an auction process that they would not have heard about otherwise?

On the Akzo Nobel transaction specifically...I have a hard time believing Carlyle didn't staff the team heavily for a $10.1 billion transaction. So did they really need not one, but two boutique shops? Furthermore, one of those shops is chemicals focused so the volume of opportunities it could have even shown Carlyle would be limited to that sector.

 
Apr 10, 2018 - 2:10pm

Draper Specter and Co.:

What does "best opportunities" really mean? Does that mean getting the PE shop in an auction process that they would not have heard about otherwise?

On the Akzo Nobel transaction specifically...I have a hard time believing Carlyle didn't staff the team heavily for a $10.1 billion transaction. So did they really need not one, but two boutique shops? Furthermore, one of those shops is chemicals focused so the volume of opportunities it could have even shown Carlyle would be limited to that sector.

Couple of thoughts:

1) Valence was used as an industry expert. Just because Carlyle is Carlyle doesn't mean that it necessarily knows more than a boutique that lives and breathes chemical M&A. As a co-advisor, Valence probably didn't do a ton of work other than focus on chemical M&A issues and valuation drivers.

2) Evercore may have been able to add some cross-border knowledge to optimize transaction structure and reduce risk. I have no idea how strong EVR's chemical experience is and whether that factored in.

I think your comment on incentives, while logical, ignores the concept of relationships and reputation. Even if Evercore is financially incentivized to get a deal done, it isn't necessarily going to provide shitty advice to do so.

Why? If Carlyle thinks EVR failed to put its best foot forward, it won't use them on future sell side (or buy side) mandates, which is highly unfavorable long-term. Additionally, if word leaks about that, EVR's reputation takes a hit in the industry and more broadly, which does not make other MDs at the firm very happy.

 
Apr 10, 2018 - 10:46am
  1. As someone just mentioned, any international deal usually requires knowledgeable buyside advisory.

  2. Bankers know clients who might want to sell their companies or assets but have not gone to market yet. Perhaps, they are just thinking about it. Info like that can be priceless to a PE firm in case they want to pre-empt a deal process by making an unsolicited offer early.

So the real value is not bringing a reasonable idea which any idiot can do - it's bringing an idea that's actionable but is not officially on the market where the true value comes into play

 
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Apr 10, 2018 - 10:10pm
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