L.E.K. Consulting: 6 strategies for high value PE buy-ins

17 July 2015 Consultancy.uk

Despite challenges, private equity funds are doing well. In recently released research, L.E.K. Consulting identifies six strategies used by winning PE firms that allow them to flourish in the current market conditions.

Private equity (PE) is flourishing. However, given current market conditions, this may come as a surprise, with fundamentals of sluggish global growth. In addition, PE firms are sitting on huge cash piles, increasing competition for targets; stock-markets are soaring, increasing and introducing high multiples; interest rates are at historic lows; and geopolitical uncertainty introduces downsides for buy-in activity.

Private Equity - LEK Consulting

Despite these various challenges, PE funds are doing well. So, what are the best PE funds doing to flourish in the current environment? To find out, consulting firm L.E.K. Consulting, for its ‘Executive Insight’ series, talked with 150 PE market leaders to discover where and how they were finding value in businesses that other PE funds might be overlooking. Consultancy.uk provides a brief summary:

Winning sector - Smaller platform - Leveraging knowledge

Choosing a winning sector early in its development
Winning PE firms develop an investment proposal based on trends or impending regulatory shifts. After which they identify a strategic segment within the larger market that they expect will benefit disproportionately in the new environment.

Buying and building from a smaller platform
Another strategy is to look for a quality target that may be missing a key ingredient, such as a lack of overseas markets, but presents opportunities to grow, organically or by acquisition. That could be a company that is small but offers entry into a market that is ripe for consolidation.

Leveraging knowledge developed from owned and divested assets
Using ‘hard-won’ knowledge and experience gained from previous investments can be indispensable in unlocking value in future deals in the same industry.

Superior management | Underperforming companies | Equity carve-outs

Deploying superior management
According to the consulting firm, top quality management is a scarce and important resource. “In a competitive environment where so many other variables are subject to commoditisation, identifying, recruiting and retaining top managers are all critical. […] The best PE firms skilfully match specific management talent with the needs of specific assets.”

Targeting underperforming companies
Top performing PE firms look at companies that have operational or strategic issues but have the potential for value creation through improvements.

Performing equity carve-outs of orphan divisions of large corporations
A final strategy is to go for equity carve-outs of orphan divisions. L.E.K. Consulting points out that while the operation might be challenging and involved, the targeted division might be a legacy division or perfectly viable operation that “for one reason or another are no longer part of the parent company’s core business.”

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Consumer goods start-ups grow interest from venture capital

23 April 2019 Consultancy.uk

Funding the latest consumer goods start-up has been a real money-spinner for venture capitalist firms, with a number of $1 billion companies – or unicorns – having emerged in the space in recent years. New analysis has explored the resulting corporate consumer products activity in the acquisitions space.

Consumer products have enjoyed years of strong growth as new markets opened in developing Asia. China in particular has enjoyed strong growth across a range of consumer good types as the country’s middle class expanded. Private equity firms have been keen to pick up targets in the space as they expand their portfolios to include additional local capacity as well as customers in new markets.

As a result, a study from Bain & Company has found that interest from PE firms in the consumer product space grew sharply in 2018, hitting 6.1% of all invested capital for the year, and making it the third most sought-after category. It is now only behind financial services (23.9%) and advanced manufacturing and services (13.9%).

Corporate venture capital investment

The ‘M&A in Disruption: 2018 in Review’ research found that growth in the segment reflects key changes in the segment as a whole. This is particularly true of insurgent brands, which often leverage local expertise in order to take on international giants in domestic markets.

Short change

The market changes have led to shifts in motivations for consumer goods company investments from PE firms. The number of strategic investments stood at 50% in 2015 compared to deals that increased scope. This has shifted significantly, with 34% of deals focused on strategic outcomes in 2018 compared to 66% for scope. The move towards scope reflects companies seeking out fast-growing products that enable stronger revenue growth streams.

Acceleration in scope-oriented M&A in consumer products

However, there were other motivations for deal activity in the space. Activist investors have put pressure on companies to expand their portfolios in recent years, with the trend expanding from just US targets to Europe.

Further trends

The other key shift in the space regards outbound deal activity. The study found that outbound deal activity has increased significantly in the Americas (up 363%) with total deal volume up only slightly (15%). Key deals included Coca-Cola and Costa, Procter & Gamble and Merck’s consumer health unit, and PepsiCo and SodaStream. In the Asia-Pacific region, outbound deal activity rose 195% while total deal activity fell sharply, by -36%. The EMEA region saw both a sharp decline in outbound deal activity, at -68%, as well as lower overall deal activity, which fell by 32%.

Cross-regional deal making

Deal-making in the current environment is increasingly fraught with uncertainties, as business models change on the back of new technologies, new consumer sentiments and wider market changes from new entrants. As such, acquisitions are increasingly useful as possible hedges on changes in market direction. As such, companies are increasingly pressed to take a future-back position, making sure to incorporate a vision of how the company needs to look in five years into acquisition strategy.

The firm notes that certain acquisitions which enhance a remembrance of a nobler mission, revive a sense of entrepreneurialism and engage directly with consumers may be necessary qualities in acquisitions that transform a company to fit market expectations in the coming decade. While going forward, focus on innovation, partnering with retail winners, reducing cost base and constantly reallocating scare resources will be necessary to protect market share in areas where insurgent local and strategic competitors are active.

Related: Private equity asset growth top priority for 2018.