As market activity picks up and private equity firms look to exit some of their portfolio companies, there will be some interesting opportunities on the horizon.

However, the “distress seller” label is something that Richard Kleiner, partner at Gerald Edelman chartered accountants, believes will affect deal prices.

‘The problem is that if a private equity vendor is looking to market a business, it often has a perceived distress seller label, which puts pressure on the price,’ Kleiner explains.

He adds that private equity houses must be prepared to say no and sit on their asset for another year to ensure the best return on their investment.

Hemen Doshi, corporate finance manager at Gerald Edelman, agrees. He says, ‘I’m a great believer that in negotiation, if you are prepared to walk away from the table then you can’t lose.’

Selling the team

Kleiner believes that one of the most important investments has to be in the management team, to ensure that there are sufficient growth channels before exit.

‘It’s about the story – if you are selling the existing management then they have to be as strong as possible.’

Kleiner sees the European market as the location most likely to see the most profitable sales.

He adds, ‘The issue is liquidity in the market and I predict that there will be an expansion into the pan-European market, where there is appetite.’

Doshi sees the resistance to valuations returning to pre-crash levels as testament to the dominance of secondary buy-outs over trade sales.

‘I still see challenges in asset values,’ he says. ‘It is private equity funds that have the money now, but the problem with that is it is historically the trade buyers who pay more because of the synergies and central overheads.’

Kleiner believes that much more preparation and advice is needed when looking towards an exit strategy. ‘It is important that the existing owners identify and resolve issues within the company before potential buyers discover them,’ he adds.

‘If you go into an investment and there is not a clear strategy, even if it might get modified over time, then you shouldn’t really be investing in the first place.’

Doshi observes that investment cycles last a lot longer than previously. Whereas a traditional private equity investment would last three to five years, he believes that a period of five to seven years is now a more realistic time frame.

‘Private equity houses are looking at a double-digit return for their investment. If they can’t get sufficient gearing then they will want to pay less to reduce the hit on their return,’ he adds.

Lack of auctions

Looking to the year ahead, Kleiner predicts that auctions will be few and far between due to the amount of time and money that goes into competing in this environment.

Kleiner comments, ‘I don’t think people have the firepower to go in. They want to dip their toe in, try and get into the driving seat and then conduct their due diligence without spending a lot of time doing it.’

Doshi sees strategic allegiances as the way forward for private equity firms looking to exit in the current market.

‘The exits are going to have to be manufactured by thinking outside the box. Smaller funds are going to be looking at bigger funds for strategic alliance, and to raise interim finance,’ Doshi adds.

See also: How to choose the right exit strategy

Richard Kleiner
Tel: 020 7299 1400
Email: rkleiner@geraldedelman.com

Hemen Doshi
Tel: 020 7492 5600
Email: hdoshi@geraldedelman.com