GPs start prepping companies for sale up to two years before a deal: EY

  • PE firms are eyeing the exits 18 to 24 months before a sale, sometimes as soon as they buy
  • Quicker exits can boost a PE firms’ IRR and help their competitive standing
  • Data analytics can speed exits, helping buyers and sellers agree on value

When it comes to pondering sales of portfolio companies, firms are thinking much further ahead, to the tune of preparing companies for exit 18 to 24 months before a sale, fresh EY research shows.

That is a jump from the past, when firms began seriously preparing for a sale about six months before a deal, Bill Stoffel, EY Americas PE leader, reports.

That extra preparation has helped PE firms take advantage of opportunistic divestitures, and 74 percent of respondents to a recent survey told EY that they were ready to jump at unsolicited bids.

PE exit activity remained high in 2018 and many firms expect the strong pace to continue in 2019, according to EY, which interviewed 100 global PE executives in September through November 2018.

PE firms made 1,175 exits globally for the year, slightly above the total number of exits in 2017. Overall deal value, at $385.2 billion, was also consistent with 2017.

Looking ahead, GPs remain focused on exit value and speed and are prepared to move quickly if market volatility picks up.

GPs are putting more thought into exit preparation than in years past, and they’re making more use of data analytics to time their exits and negotiate prices with buyers, Stoffel said.

“Private equity used to pride itself on the buying and not necessarily the selling,” Stoffel said.

“I think over the last five years the sophistication around the selling has really increased. Instead of asking ‘is this the right time to sell?’ the question has been flipped on its head and has become why ‘wouldn’t I sell?’”

The prevalence of IRR to compare PE funds also puts more pressure on exit speed and rewards earlier exit preparation, Stoffel said.

Better data analytics have also helped increase the speed of exits, by efficiently getting buyers and sellers to a common understanding of a company’s value, he added.

“The use of data analytics allows you to show the story instead of tell the story, and you see that playing a bigger role in the exits,” Stoffel said.

“People are using data analytics on cohorts and how the business is doing a lot more than they have in the past, and I think that’s good for everybody.”

Eighty-seven percent of firms surveyed said they used analytics to make their latest exit decisions. Those firms generally believed that data analytics added the most value during the diligence process prior to acquisition and in presale preparation at exit.

Over the past year, M&A activity has gained additional ground on organic growth as a primary exit strategy, according to the survey. In 2017, 43 percent of respondents said organic-growth potential was an important aspect of their exit strategies, a number that dropped to 16 percent in 2018.

Stoffel said organic growth remained an important component of PE exits, especially given high multiples being paid for companies. PE firms need to look at both M&A and organic growth as tools to add value and get their desired sale prices, he said.

“With these multiples, you can’t just do financial engineering, especially with the cost of debt likely to rise,” Stoffel said. “That dog doesn’t hunt anymore.”

Despite market uncertainty related to tariffs, a trade war, and geopolitical concerns, PE firms view the seller’s market as resilient, according to EY.

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