There is a lot of competition among private equity providers. For sellers, there is a lot of choice but there is also risk.
Money sloshes over the skirting boards
Dutch private equity houses have raised a lot of money in recent years. In 2017, a record amount of no less than €4.4 billion. With this, the Dutch private equity houses benefit from the trend that more and more assets are invested in private equity. See our blog.
Returns in this segment have been high in recent years and have proven to be a good alternative to the stock and bond markets. Not only are the coffers well filled, many new private equity companies have entered the market. Split-off teams, new teams and the so-called family offices that manage the assets of a specific family. All of these parties have the responsibility to invest the acquired funds in such a way that the assets are generating double-digit returns.
High demand, low supply
But finding a good investment is no easy task in today’s market. How exactly is that single investment found that fits the private equity firm’s philosophy? And if it is found at all, can the company be acquired at the right price? And this is precisely where the shoe pinches. There is so much supply of capital from private equity that the market has become very competitive. For every large and well-run company that comes up for sale, private equity firms line up.
Differentiating private equity
So it is becoming increasingly important for private equity parties to become more commercial and establish themselves as the most attractive party.
But how can they distinguish themselves? Many parties claim to be transparent or to act quickly, which may be different from the past, but is hardly a selling point nowadays. In our view, the difference lies in the willingness to get to the bottom of the business quickly and, together with the seller, to look at the best options for developing the business over the next five years. Specific knowledge of the company and sector is indispensable here. Nevertheless, many private equity firms operate generically and have no specialization in sectors. Paradoxically, the fear of not missing opportunities thus rather leads to the opposite.
Still, there is a risk with the seller
For private equity firms, the first challenge is to be invited, and for that the network is widely used. In most cases, they will try to bid high in their first bid.
While interest in the sales process can be interesting from the seller’s perspective, it also has its drawbacks. A high stake means that they may be giving too positive a presentation that they will have to adjust later in the process.
The initial bids are followed by a book examination. The outcome of this also determines how they will need to further negotiate the terms of the transaction.
In the book examination, many issues come up that could mean a correction of the purchase price. A small sentence in the indicative bid can have far-reaching consequences in the final purchase price. We increasingly see a lot of discussion about average working capital, excess cash that may or may not be distributed to the seller and calculation of the debt position.
Providing a lot of information in the sales process prevents damage afterwards
From Clifton Finance, we have chosen to properly adapt the process of sale to this new situation. In the areas where potentially large corrections can follow in the final book review, we provide a lot of information to the prospective buyers precisely at an early stage. This is to manage their expectations and avoid corrections afterwards. We expect the buyers to make their analysis well in advance and include it in the indicative bid.
This reduces the chance that the buyer and seller will renegotiate the purchase price downwards after the due diligence. For both the buyer and the seller, there is more deal certainty
that the transaction can actually be completed on good terms and with sufficient certainty; a win/win situation.
Would you like to talk to us without obligation? Please call Clifton Finance:
Maarten Vijverberg +31 6 55853074 or Gonneke van der Lee +31 6 52466518.