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Importance of PE Funds in the M&A Deal

27th June 2022

Published Date: 27-June-2022

Private Equity (PE) Funds provide significant advantages in volatile economic environments. With activities surpassing the 25% record set in 2006 in the M&A market in 2021, the levels of active involvement continue to grow across the board.

Those that hold PE funds are highly selective about the deals they pursue. Their resources are spent assessing potential companies, evaluating the risks, and finding ways to ease them. With these funds, M&A deals can access debt-free capital that can stabilize finances or pursue other specific profit-making goals.

Private equity M&A activity display these fundamental characteristics and advantages in virtually all deals.

Cash Flow and Leverage

PE typically uses debt and cash to acquire a business. This leverage creates a higher IRR (internal rate of return) since it’s based on the invested money only. The interest paid on the debt once the business is owned becomes part of the annual EBITDA, allowing the focus to be on improving cash flows while staying within the boundaries set by the tax code.

PE typically prefers a hands-on approach that often leads to significant improvements in the bottom line, even if there are contrasting proposals for moving forward. The funds work on economies of scale and scope to deliver results.

Builds a Portfolio

PE funds use the M&A process to add to an existing portfolio whenever possible. It’s an aggressive approach that works to eliminate overlapping expenses while looking for increased multipliers that comes from high-profit businesses. Combining multiple smaller agencies into a larger one can increase values by 50% or more, generating a substantial IRR.

The spending is significant and selective. It’s not unusual for thousands of potential companies to be drilled down to one with the best opportunities to achieve growth targets.

Strong Financial Controls

Once an acquisition is complete, PE funds focus on internal reporting and streamlining operations to eliminate unprofitable units. Eliminating operational inefficiencies within the structure makes it easier to identify the best decisions to make when moving forward. The synergies involved strive to create added value by leveraging the strengths on all sides of the M&A process to create something bigger and better.

Finite Timelines

Most PE funds come into the M&A process with an exit plan established when getting involved with a deal. That’s a shift in the thinking process of the typical industrial buyer who purchases for permanent results through ongoing ownership goals and organizational integration. Although opportunities for value generation are not ignored, the goal is to get in, earn profits, and get out to continue the resource-building process. There are a growing number of buy and hold Funds entering the marketplace who’s decision making processes reflect an asset accumulation model rather that a profit extraction model.

Risk Diversification

The M&A process creates unique opportunities for PE funds to diversify and spread-out risks through multiple revenue streams. When the focus is only one, the financials rise and fall based on their success and failure. With alternatives available, some support, even if others hold or fail.

Through carefully constructed deals PE funds accrue multiple benefits from good acquisitions. The delivery of capital, skill sets and experience can maximize the returns for all the parties to a deal.

If you want direct anonymous access to transatlantic as well as national deals above $1m value for your clients or fund, schedule a demo today.

M&A Markets
Importance of PE Funds in the M&A Deal

M & A Markets provides access to a marketplace that is unique to any other deal space.

"The delivery of capital, skill sets and experience from PE Funds can maximize the returns for all parties to a deal."
– Ronan Cleary twitter social icon Tweet

M & A Markets provides professional firms with anonymous access to a national and international network of advisors who specialise in buying and selling businesses on behalf of their clients above $1m.

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