Strategies Post Acquisition in Private Equity
January 6, 2025
What Happens After a Private Equity Buyout?
After a company is acquired by private equity, it will typically undergo significant changes aimed at increasing its value. The PE firm actively monitors and manages the company, often involving the incumbent management team in strategy formulation and execution. This phase is characterized by active governance, strategic repositioning, and close progress monitoring.
Key Learning Points
- Once acquired, a private equity-owned company will likely undergo major operational changes to increase the value of the firm
- PE funds will have a series of planned strategies to enhance company value which may include:
- Repositioning the business
- Cost cutting and driving efficiencies
- Pushing for revenue expansion
- Positioning the company ready for a future sale
- Typically, the incumbent management team will be involved in this process but there may be new appointments or experts brought in from the PE team’s contacts
What are the Post-Buyout Strategies for Acquired Companies?
Post-buyout strategies focus on operational improvements, strategic growth, and preparing for a successful exit. These strategies include repositioning the business, enhancing efficiencies, cutting costs, driving revenue growth, and identifying and integrating additional acquisitions to bolster the company’s market position. Ensuring the company meets value creation milestones and remains attractive to potential buyers is also a critical component.
Attractions for Private Equity Investment
A company will have initially attracted private equity interest as it offered some kind of scope for the financiers to enter, enhance the company’s value as quickly as possible and then sell on for a sizeable profit. This catalyst can be a myriad of reasons ranging from: a weak economic environment, slow sales, rising costs, poor management, rising cost of company debt, significant market competition, or simply ongoing underperformance.
Conversely, that investment interest could be triggered by new market opportunities, attractive sales growth prospects, and the desire to push the company’s performance ahead of peers and garner a higher (and more profitable) market share. The private equity team will have identified a particular area where it has experience and can ‘add value’ to the firm. Thus, it will have purchased the company with a view to instigating these changes immediately to drive value growth.
Monitoring Phase
Once an investment is made, an active ownership model and hands-on governance allow private equity firms to drive operational value creation during the holding period. Private equity investors, management, and independent advisors work to reposition the business, reformulate strategy, and closely monitor its progress post-investment.
Portfolio companies’ initial strategy draws mainly on the incumbent management team’s vision for the business and other areas identified by the private equity investor during due diligence. The company strategy is discussed with management throughout the pre-deal process not only to receive their input but also to ensure their buy-in for subsequent implementation. However, the strategy is not set in stone as private equity’s active ownership model allows ongoing reviews and revisions of the strategy and business plan.
Roles During the Holding Period
During the holding period, private equity firms have three roles:
- Monitoring the investment on behalf of limited partners
- Helping management create value
- Preparing for exit
Regular Reporting to Limited Partners
Overseeing and monitoring the investment involves providing regular reports to the limited partners (LPs). This will include developments, milestones accomplished, and valuation changes. Typically, it takes the form of quarterly and annual reports that are sent to the investors informing them of progress-to-date and ongoing plans.
It will include updates on the private equity firm’s activities, overall valuation, and individual portfolio investment valuation and developments. Sometimes monthly results are also made available; however, this is less usual and will be limited to the financial results of the investment that month.
Audits of the fund completed by external auditors are also sent, but this is handled by the finance team of the private equity firm with little input from investment professionals. LP meetings are organized by the private equity firm quarterly and annually, where all employees of the firm will meet and present in-person about the fund and its portfolio to all the investors. These are often multi-day marketing events with informal dinner or lunch meetings included.
Governance and Value Creation
Governance and pushing operational value creation of the investment involves interacting frequently with management of the portfolio company. This will usually be done through a two-pronged approach: the first is through the board of directors on which some of the private equity deal team members will sit alongside other CEO, CFO, and some independent board members that the private equity firm has appointed.
Overseeing Management Strategy
This forum will oversee management strategy and provide checks and balances to the investment. Subcommittees may be formed (such as the audit or compensation subcommittee) but essentially the board will act as a sparring partner with management to influence management and to make sure that the investment is meeting or exceeding plan. If things are not going well with an investment, the board is critical in helping management with solutions and keeping the team accountable.
Bringing in Advisors and Experts
The second option is through direct intervention from the private equity deal team and external resources such as advisors of the private equity firm’s network. This is normally in parallel to the board. The teams will employ advisers such as investment banks, consultants, or other experts when necessary. Sometimes solutions may be trickier than expected to implement so the PE fund will be monitoring closely and adding further resources if needed to keep the value creation on track. Examples of some of the projects would include refinancing, M&A activity (finding bolt-on acquisitions to drive growth), business plan and strategy implementation, and finally, preparation for exit.
Examples of PE Buyouts
Heinz (3G Capital and Berkshire Hathaway)
Deal Value: $23 billion
2023 saw one of the largest US food industry buyouts: 3G Capital and Warren Buffett’s Berkshire Hathaway teamed up to acquire publicly listed Heinz. This buyout led to major operational changes, with 3G Capital introducing cost-cutting measures. The partnership later acquired Kraft Foods to form the Kraft Heinz Company, seeking to leverage economies of scale and reinvigorate the classic consumer brands. (The New York Times)
Hilton Hotels (Blackstone Group)
Deal Value: $26 billion
Blackstone’s buyout of Hilton Hotels in 2007 remains one of the largest leveraged buyouts in history. Despite economic downturns, Blackstone focused on growing Hilton’s global footprint and preparing it for a public listing. It’s strategic approach enabled a highly successful exit when Hilton went public in 2013, netting Blackstone significant returns. (The New York Times)
Download the top 10 Private Equity deals in the US.
Timeline and Exit
The timeline for value creation will likely be relatively short compared to the life of the company. A PE fund will be pressing for value-enhancing improvements so the company can be sold to a new owner. Monitoring the value creation and keeping it on track will be critical to the performance of the PE team’s fund.
Once sufficient improvements have been made, the company will be prepared for sale. This may be to another private equity firm who will have the skillset to further enhance value (such as driving international growth), or it could be to another company in the sector. The timing of the exit will also need to take account of market conditions which may have changed since the initial investment was made.
Conclusion
Post-acquisition, the PE fund will take a very active role in instigating improvements in the company it has purchased. It will have skills it can bring to the company such as improving its debt profile or operations to create additional value at the company. Strong cash flow generation will be a critical part of this strategy as the cash will be used to pay down the debt used to purchase the company as well as drive the valuation to a new benchmark. Close monitoring of the strategies put in place will help keep this on track and in line with the initial purchase entry and exit targets.
The private equity course prepares you for a buy-side career by teaching financial statement analysis and structuring complex add-on acquisitions in leveraged buyouts.