Transaction Services

A successful private equity investment begins with a clear view on the sectors of interest to the fund, driven by a clearly articulated investment strategy. This is followed by systematic lead generation and thorough assessment. Once a promising target is identified, the quality of the due diligence process is critical. Here are six key steps to follow:

1. Assemble the right due-diligence team with in-depth industry knowledge, and hit the ground running on day one.
2. Assess the sustainability of the business, especially identifying the downside risks and how they can be mitigated.
3. Identify the long-term growth opportunities, and make sure the company has the minimum capabilities to take advantage of them.
4. Start developing what BCG calls the full-potential plan early, paying particular attention to the short list of cost-improvement initiatives that will deliver quick results.
5. Identify the potential upside that can be targeted to deliver substantially more value than the asset’s base-case business plan.
6. Understand management’s ability to deliver the investment case and what adjustments might be required.

Following these steps helps a private equity firm determine whether or not a clear business case can be made to acquire the target company.

Sooner or later, every private investment will culminate in an exit—either the sale of the asset to another company or an IPO on the public capital markets. Exit is the all-important moment that, if successful, will realize the value the private equity firm has created, thereby justifying the original investment.

In order for a business to be attractive to a new owner, it needs to have an attractive future. The company’s recent trajectory or current cash flow is not necessarily the predictor of future success. Far more important considerations include whether the company has strong capabilities and is well positioned to take advantage of new growth opportunities.

A private equity owner needs to ensure the business is positioned to deliver value for years to come. Planning that future doesn’t start at the moment of sale. Private equity owners need to think a good 18-24 months ahead and start making moves today that will position the asset for sale in the future. One way to do so is by developing a 500-day plan.

The challenge of pulling off a successful exit is even greater today than it has been in the past. Private equity firms are under intense pressure to exit those assets acquired during the boom years of 2006-2008. But the assets they bought at a premium are now coming up for sale in a far less buoyant market environment—all the more reason for firms to plan their exits carefully.

A comprehensive equity story and systematic vendor due diligence are also necessary elements of successful exit preparation.