If you are a Private Equity backed businesses moving to the end of your current Private Equity ownership cycle and need to learn how to manage next steps, BDO’s Realise brochure is your complete guide.
KNOWING THE NEXT MOVE PRIVATE EQUITY
DEMYSTIFY NAVIGATE ACCELERATE
REALISE
CONTENTS:
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INTRODUCTION
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LAUNCHING YOUR FORMAL SALES PROCESS
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MANAGING THE DEAL PROCESS
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IDENTIFYING THE RIGHT BUYER COMMUNITY
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CASE STUDY – WHY BDO
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CONTACT US
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BDO – REALISE
BDO has created this programme to support management teams in understanding the world of Private Equity. We help our clients make informed decisions, maintain stakeholder alignment and achieve a positive outcome at the end of the Private Equity ownership cycle. it enables businesses to take advantage of market opportunities that can rapidly increase their value. Private Equity investment offers ambitious businesses and management teams the potential to achieve accelerated growth over a relatively short time frame. Handled in the right way,
THE BDO DIFFERENCE: INTEGRATED ADVICE & SERVICE ALIGNED TO YOUR NEEDS
Following on from Demystify, Navigate and Accelerate, this chapter – Realise – considers how the exit process works and why our clients trust us to assist them in delivering the best possible return. The process of realising an investment commences well before the final transaction. A successful exit from Private Equity requires early planning to maximise value and minimise risk. The three key stages are: X Making the decision to sell X Preparing the business and identifying the right buyer community X Managing the deal process As a PE investee company it is important to recognise that the business is always for sale, it is always in the shop window. This means that you must quickly be ready to sell if the right opportunity presents itself. The ramifications of this are explored in this publication in more detail. BDO is passionate about helping our clients, entrepreneurially-spirited and ambitious
management teams. Our highly motivated advisors deliver pragmatic, sector based advice. We build durable relationships throughout a business’ journey. We communicate openly and frequently and we like to share and collaborate. We act with integrity and work with a sense of care but we are also curious; this is how we do business.
TAX STRUCTURING
GROWTH STRATEGY
THE BDOWAY MATCHING SCALE WITH AGILITY X Business positioning - the right solution for each and every client. One size does not fit all X Familiarity with the entrepreneur’s mindset X A partner by your side developing and selling your story X Market presence - wide reaching, well-established national and international network
ASSURANCE & EXIT READINESS
LEAD ADVISER
PERSONAL TAXATION
VENDOR DUE DILIGENCE
FORENSIC SPA REVIEW
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LAUNCHING YOUR FORMAL SALES PROCESS
POSSIBLE EXIT TRIGGERS Market opportunities Company-specific performance Macro-economic conditions Private Equity investment cycles
EXIT OPTIONS Sale to Private Equity
Sale to trade Listing (IPO) Refinance
Private Equity ownership has a defined start date and may well be characterised by an anticipated hold period. However, management teams face numerous issues and challenges leading up to and during the sale process. The capital event that marks the end of a Private Equity investment should be executed in a planned, well thought-through and precise way to maximise value and minimise risk. It is never too early to plan.
PLANNING THE EXIT FROMTHE START Achieving the greatest returns begins with ensuring that “exit readiness” is a Board agenda item from day one. The strength of the articulated value story and preparatory work undertaken is often the difference between an exit that offers outstanding returns and one that disappoints. We help businesses stay forward-looking during the entire PE lifecycle by: X Providing challenge around progression against the stated corporate strategy X Identifying growth opportunities that enhance performance – both organically and through acquisitions X Understanding the likely buyer communities and transaction options X Assessing upon the best exit process.
WHEN IS IT TIME TO SELL? The ultimate goal of Private Equity is to realise a superior return to its funders compared to other investment opportunities (stock market, bonds etc.). Therefore a PE portfolio company will be “always for sale”. Hold periods vary, typically between three to five years, and therefore an exit is a natural part of the evolution of every PE transaction. That exit may be planned, but it may also be a response to events in the market. In the run up to an exit, it’s hugely important that all stakeholders are aligned in their ambitions for the business and the corporate strategy sets out the road map towards that preferred exit route. We work with businesses to ensure that when the right opportunity arises – even at short notice – they are primed and ready to take advantage.
RELENTLESS FOCUS ON MAXIMISING RETURNS AND MINIMISING RISK
CORPORATE STRATEGY – Is there a well-defined investment hypothesis? – Is the PE journey evidenced? – What is the exit plan?
RISK – Have potential exposures been assessed (eg cyber security, tax, FX)? – Is there a robust control environment? – What does the scenario planning say about the future equity story?
FINANCIALS – Are the appropriate KPIs tracked? – Does the management information support the value story? – What does the history of previous period say about the next period of growth?
LEADERSHIP – Is the right team in place? – Are they appropriately incentivised? – Is there a clear succession plan and talent pipeline?
REPORTING – What accounting policies need detailed explanation? – How much forward visibility is there on revenue (eg order pipeline)? – Have any acquisitions been fully integrated?
OPERATIONS – Is the right corporate structure in place? – What operational initiatives are envisaged? – What further capital investments have been made?
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MANAGING THE DEAL PROCESS
Detailed preparation and planning enhance value and delay surprises. Using a straightforward and structured approach to every transaction mitigates risks and drives value at each step of the process. The deal process is set out below over several steps, including those that should be considered well in advance, with a high level view of matters to be considered at each stage. BDO’s Private Equity group is a highly collaborative network of more than 400 experienced advisers with deep sector and industry knowledge. This practical, real- world team has a profound understanding of the Private Equity industry, particularly in the mid-market. Our people can configure and tailor these steps to meet your needs at every level, interacting with funds, advising on deals and working closely with portfolio companies to help them realise their goals.
TRANSACTION READINESS – >2 YEARS PRE-DEAL
TRANSACTION PROCESS – TYPICALLY C.4-6 MONTHS
POST TRANSACTION
PATHWAY TO SIGNING
NEW STRUCTURE
COMPETITIVE TENSION
SALE PROCESS
BUYER INTELLIGENCE
BUSINESS PLAN / KPIS
INFORMATION PRESENTATION
TIMING DISCUSSIONS
X Assessment of: X Exit readiness X Buyer attitudes X Market dynamics X Track record of profit progression X M&A opportunities X Critique management team appetite and talent pipeline X Frame material tender / contract renewal timings
X Express clear and
X Align to investment hypothesis X Granular preparation with supportable assumptions X Commercial due diligence (DD) should validate top line X Include selected outputs in marketing materials X Consider scenario planning X Assess and quantify potential upsides
X Pre-qualify to credible buyers’ list X Get to know interested parties (financial and strategic) X Share selective data to whet appetite X Assess synergies (if relevant) X Ensure VDD scoping covers key buyer questions X Seek best possible funded offers
X Present supportable EBITDA measure for valuation X Prepare insight-led vendor due diligence (VDD) materials X Manage PR / media interest X Narrow the buyer field X Establish data room X Consider staple financing option X Hold management presentations
X Control access to management X Well-managed Q&A process with timely responses X Ensure a range of potential buyers X Avoid surprises (eg short-term targets are met) X Reiterate key messages
X Controlled access to VDD providers X Timetable discipline X Sales and Purchase Agreement (SPA) guidance and support X Provide current trading update as appropriate X Deliver optimal tax structure X Negotiate final offers and deal completion
X Input into 100 day considerations X Assess wealth
consistent articulation of value story X Prepare KPIs aligned to stated strategy X Ensure a robust control environment and scalable infrastructure X Define operational plan X Frame impact of innovation / digital disruption X Assess potential tax exposures / mitigants
management options
X Implement revised
reporting requirements
X Work through any integration issues X Draw up pipeline of M&A opportunities
(eg trading resilience / underpinning, cash conversion)
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IDENTIFYING THE RIGHT BUYER COMMUNITY
An early assessment of the potential buyer universe helps management teams and the Private Equity investor determine the exit options and the investment thesis that will drive the greatest competitive tension.
INFORMATION REQUIREMENTS The depth of information requirements typically varies depending on the type of exit transaction planned.
WHAT ISA POTENTIAL BUYER LOOKING FOR?
Growth in market share Access to new products or markets Access to IP, technology or talent Forward looking revenue visibility Operational potential Profit resilience.
LOW
HIGH
Broadly speaking, buyers come from two main communities: strategic (trade) or financial (investors). Strategic buyers are often competitors, suppliers, or customers who are looking to gain market share or access to new markets. Financial buyers, such as another Private Equity house who will fund a secondary buyout, are more focused on realising a return on investment. As such, the way that businesses are evaluated, valued and marketed needs to be aligned to their respective motivations. Alternatively the company’s shares could be sold, either a full or partial divestment, to the public markets through an Initial Public Offering (IPO). Listing of shares is subject to strict regulatory requirements and restrictions which need to be planned and documented throughout the Private Equity lifecycle.
Factors that should be considered when identifying potential buyers include: X Is there a ready made group of strategic buyers looking for opportunities? X Is there another equity story that can be defined? X What are management’s intentions? X What is the envisaged debt capacity of the business? X Would the capital market value the business or fuel the growth more efficiently?
Sale to Private Equity
Sale to trade
THE RIGHT INFORMATION FOR THE RIGHT OUTCOME By identifying and planning a clear exit strategy, businesses can demonstrate a strong track record in accurately reporting the necessary information and supporting the areas with perceived growth potential. A “dual track” represents where businesses conduct an auction or other sale process concurrently with filing for an IPO. An IPO would typically require fuller financial reporting procedures but in some instances require less granular commentary around trading drivers.
Listing (IPO)
Refinance
Dual track (a combination)
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CASE STUDY AGILITAS IT SOLUTIONS
Agilitas is a leading provider of global technology solutions to the IT channel, specialising in software enabled “Inventory as a Service”. It is a mission critical partner for its clients across the IT channel from OEMs to managed service providers, operating in over 65 countries worldwide. The business was initially backed by NVM Private Equity in 2014, with the investment fuelling Agilitas’ growth plans nationally and internationally. Through extension of service capability and increase of geographical foot print, the business delivered double digit growth and margin enhancement over the course of NVM’s investment. In 2020, the time was right for NVM to realise the value created and find a new partner for management to execute the next phase of growth. BDO was engaged to run a full sell-side process, working closely with management and NVM from the outset to prepare the company for sale. The team quickly developed its understanding of a complex business, utilising its expertise in the IT channel to positon value drivers, overcome key commercial issues and articulate the growth story appropriately. BDO’s established relationships within the UK and International PE mid-market ensured a short list of credible investors to deliver a highly efficient and competitive process. The result was an incredibly successful outcome for all stakeholders. NVM exited in full realising an 8.4x return and management secured a new investment partner in Perwyn Private Equity with the requisite resource to accelerate the growth plan and execute a number of transformational opportunities.
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PCPI V PRIVATE EQUITY Q1 2018 – Q4 2021
20
18.0
17.5
17.5
16.8
14.8
15
12.8
13.9
13.5
12.6
12.8
13.0
11.8
12.5
12.6
10.7
12.0
12.4
12.1
11.8
12.9
11.9
12.2
12.2x
12.3
12.2
10
12.0
12.0
11.6
11.8
11.5
11.8
10.3
11.4
11.6
10.6
10.6
10.2
10.1
10.4
10.2
10.6
10.3
10.1
10.4
10.0
9.6
9.8
5
9.5
0
Private Equity activity is influenced by global economic and geopolitical events. Q2 of 2020 saw deal stats down 53% year on year; however, PE houses flexed quickly and refocused on resilient sectors like tech, healthcare and life sciences. 2021 saw the strongest year for deals since 2008 with 2782 completions. It marks a very strong recovery from activity levels in 2020, a rebound of 42% which was reflected equally across trade and PE transactions. There is still a lot of PE money in the system; with new funds being created, we can only expect to see more deals.
BDO’s Private Company Price Index (PCPI), which tracks the volume of deals completed by quarter, demonstrates ongoing resilience in the M&A market. In addition, the Private Equity Price Index (PEPI), which represents the multiples paid by Private Equity buyers, remains strong reflecting the high levels of competition for quality businesses. The combination of Private Equity funding levels, low interest rates, the relative weakness of sterling, liquid debt markets and cash rich corporates means that the number of buyers exceeds the number of attractive acquisition opportunities. We help our clients attract higher multiples by cutting through the complexity and making their business stand out for the right buyers.
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2018
2019
2020
2021
FTSE All-Share
Private Equity Price Index EV/EBITDA
Private Company Price Index EV/EBITDA
Q1 2018 TOQ4 2021 VOLUME OF DEALS COMPLETED
800 700 600 500 400 300 200 100 0
164
117
103 80
125
121
110
90
85
76
96 108
74
91
70
631
622 609
592 612
509 485 488
509
507
506
486 521
36
423
338
214
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2018
2019
2020
2021
Trade
Private Equity
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CONTACT US
WE WANT TO HEAR FROMYOU
OUR PE BLOG SERIES COVERS A NUMBER OF TOPICS THAT MIGHT
Managing a capital event alongside Private Equity requires early preparation, informed viewpoints and a focused management team. Whatever your personal goals and corporate strategy, we look forward to supporting you in achieving success.
BE RELEVANT FOR YOUR BUSINESS.
Definitions in this document have been sourced from industry bodies BVCA and ICAEW (‘A Guide to Private Equity’; ‘Private Equity Demystified’).
Contact JAMIE AUSTIN on +44(0)77 7192 8208 for more information. We look forward to meeting you and learning about your business.
FOR MORE INFORMATION:
This publication has been carefully prepared, but it has been written in general terms and should be seen as containing broad statements only. This publication should not be used or relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained in this publication without obtaining specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any responsibility or duty of care in respect of any use of or reliance on this publication, and will deny any liability for any loss arising from any action taken or not taken or decision made by anyone in reliance on this publication or any part of it. Any use of this publication or reliance on it for any purpose or in any context is therefore at your own risk, without any right of recourse against BDO LLP or any of its partners, employees or agents. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members’ names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO member firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate
JAMIE AUSTIN +44(0)77 7192 8208 jamie.austin@bdo.co.uk SARAH ZIEGLER +44(0)77 7299 0354 sarah.ziegler@bdo.co.uk
within the international BDO network of independent member firms. Copyright © March 2022 BDO LLP. All rights reserved. Published in the UK. www.bdo.co.uk
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