GPs asked to prove value-add credentials

In order to successfully acquire a target portfolio company, fund advisers are finding that they have to do more than just offer the highest bid, observe market sources speaking to pfm.  

According to one M&A lawyer who walks GPs through the acquisition process, private equity firms are finding that “they have to prove they're the best partner for a management team”, something that includes discussion over how the adviser plans to improve operations at the company and a demonstration that they understand the target's business and sector.

“If you just offer the most money but don’t have any expertise you are unlikely to get the deal done,” said a second M&A lawyer, who adds that management teams may assume you don’t understand the sector if your valuation is considerably above the rest of the bidding pack. “You have to be able to show you can do more than just financial engineering.”

A third source echoed the sentiment by describing a GP who lost out to a rival when attempting to acquire a technology company despite being the highest bidder. The losing GP had a generalist strategy and hadn’t purchased a company in any similar field, whereas the successful GP had a stronger track record of doing deals in the sector.

To prove sector capabilities GPs are often putting forward operating partners or their network of executives in a particular sector in order to gain management’s trust.

A third legal source said that management teams better understand the private equity model today and may have even been through a previous buyout, meaning they are ramping up their due diligence of advisors seeking their business and want to see GPs' value-add credentials.

Indeed Terra Firma chief Guy Hands recently named operational expertise as the key for private equity success. “A lot of this [operational] stuff is not very glamorous, it is not very exciting, it doesn’t make the headlines,” he said at the 2014 PEI Operating Partners Forum last month. “But our view – and it is a very strong view – is that if you do this consistently, you create added value.”