A major benefit of buying to sell in such situations are plain – though, again, often overlooked.
Consider an acquisition that quickly increases in value. Generating an annual investor return of, say, 25% a year for the first three years—but subsequently earns a more modest if still healthy return of, say, 12% a year.
A private equity firm that, following a buy-to-sell strategy, sells it after three years will garner a 25% annual return.
However, a diversified public company that achieves identical operational performance with the acquired business—but, as is typical, has bought it as a long-term investment.
Such a company will earn a return that gets closer to 12% the longer it owns the business.
For the public company, holding on to the business once the value-creating changes have been made dilutes the final return.
In the early years of the current buyout boom, private equity firms prospered mainly by acquiring the non core business units of large public companies.
Under their previous owners, those businesses had often suffered from neglect, unsuitable performance targets, or other constraints.
Even if well managed, such businesses may have lacked an independent track record because the parent company had integrated their operations with those of other units, making the businesses hard to value.
Sales by public companies of unwanted business units were the most important category of large private equity buyouts until 2004. According to Dealogic, and the leading firms’ widely admired history of high investment returns comes largely from acquisitions of this type.
Recently, private equity firms are aiming for greater growth and have shifted their attention to the acquisition of entire public companies. Thus creating a new challenge for private equity firms.
In public companies, easily realized improvements in performance often have already been achieved through better corporate governance or the activism of hedge funds.
For example, a hedge fund with a significant stake in a public company can, without having to buy the company outright, pressure the board into making valuable changes such as selling unnecessary assets or spinning off a non core unit.
If a public company needs to take private equity to improve its performance, the necessary changes are likely to test a private equity firm’s implementation skills far more than the acquisition of a business unit would.
Another example was when KKR and GS Capital Partners, the private equity arm of Goldman Sachs acquired the Wincor Nixdorf unit from Siemens in 1999. They were able to work with the incumbent management and follow its plan to grow revenues and margins.
In contrast, since taking Toys “R” Us private in 2005, KKR, Bain Capital, and Vornado Realty Trust have had to replace the entire top management team and develop a whole new strategy for the business.
Do you want access to private equity or funds?
Bringing this article back home to Nigeria. Do you want access to private equity or funds? If you are an entrepreneur or a business, then you need to meet the following requirements:
- registered with the CAC – Corporate Affairs Commission in Nigeria preferably a Limited Liability Company
- be in operation for a minimum of 3 years
- a growth focused company (like Health Plus, Dominos Pizza, KFC, etc) and
- have audited accounts.
If you meet only number 1 of the above criteria, send a Whatsapp message to +234 903 915 1191 for a quick confidential chat.
Call us on +234 903 915 1191 for a quick call on how we can make you to receive Private Equity.
You can also contact us in the contact box below and explain to us your unique challenge around accessing funding to grow your business exponentially.
Part of article was originally published under Harvard Business Review