Private equity firms aren’t rushing exits


Focus on value creation now to drive greater future returns


With higher interest rates and a more challenging financing environment, private equity firms are shifting their strategies and timing when it comes to exiting their investments.


“A lot of portfolio companies, especially those acquired during the high-valuation period of 2021 to 2022, would sell at lower multiples now compared with when they were acquired,” said Colin Singleton, a Grant Thornton Transaction Advisory Services Partner. 

Colin Singleton

“A lot of portfolio companies, especially those acquired during the high-valuation period of 2021 to 2022, would sell at lower multiples now.”

Colin Singleton

Grant Thornton Partner, Transaction Advisory Services


Through the third quarter, nearly 70% of deals in 2023  were worth less than $500 million, according to PitchBook data. That’s a greater portion of deals worth $500 million or less than in any of the previous 10 years.


Many PE firms are choosing not to sell their investments during this time based on potentially lower returns. But they’re hardly standing still, either. They’re altering their growth plans and focusing on increasing value primarily through operational initiatives focused on performance improvement and add-on acquisitions.


A number of factors, including the availability of capital, LP liquidity needs and preferences and the financial performance of their portfolio companies, will affect how much longer PE firms can wait to sell their investments. But they want to sell on terms that are most beneficial to them and they’re doing everything they can to tilt those odds in their favor.




Funding continuation vehicles


Many PE firms are getting creative with their exit plans, sometimes making substantial changes to the original thesis that led to their purchase of a portfolio company. It’s a path to a richer exit in the future than they might have anticipated, but it often requires additional investment.

Melanie Krygier

“Funds are setting up continuation vehicles to facilitate additional co-investment to specifically focus on a platform or subset of platforms.”

Melanie Krygier

Grant Thornton Partner, M&A Tax Services


“Funds are setting up continuation vehicles to facilitate additional co-investment to specifically focus on a platform or a subset of platforms,” said Melanie Krygier, a Grant Thornton M&A Tax Services Partner. “This can fuel growth beyond what they originally anticipated when they made the investment.”


While extending the duration that a portfolio company is held, these investments are providing a mechanism for continued growth.


Candice Turner, Grant Thornton’s National Managing Principal, M&A Tax Services, said that as sales of interests in single assets in the secondary market become more common, the transactions can be structured in many ways as secondary investors pay for leverage.


“There are a lot of ways of taking what you own and packaging it differently and selling it to new investors,” Turner said. “Single-asset secondary investments have been around for a while, but they’re becoming hotter in this market than they were before.”

Candice Turner

“Single-asset secondary investments have been around for a while, but they’re becoming hotter in this market.”

Candice Turner

Grant Thornton National Managing Principal, M&A Tax Services


A related trend is a greater desire for diligence services around these secondary sales. In the past, secondary investors were inclined to trust that the PE firm had recently performed diligence on an asset when it made the purchase. Now secondary investors are more likely to want a new look at diligence from their own perspective, particularly around tax issues that may need to be addressed.


For the PE fund, the secondary investment can be a way to get value from an asset on a different timeline.


“If a PE fund is wondering if it’s going to get the value it wants out of a four- or five-year hold for one of its portfolio companies, it may be looking for ways to sell off part of that asset and raise more capital to invest in something else,” Turner said. “Or they may be looking for ways to package it differently and get some value for it earlier.”




Carving a new path


PE firms have also started pursuing carve-outs as an alternative investment strategy.


Carveouts and divestitures represented 9.3% of buyouts in Q2 and 8.9% in Q3, according to PitchBook data, well above the percentages recorded in late 2021 and early 2022. Although carveouts tend to transact at lower multiples because of the risk and uncertainty associated with them, their popularity has risen in the current environment.


“A lot of carveouts are now coming to market, and we’re seeing clients that have the risk appetite and the expertise with carveouts getting those deals done,” Singleton said.




Strengthening portfolio companies


Singleton said that within PE, there’s a greater focus than ever before on the increasing EBITDA of portfolio companies.


This is being done through a number of strategies. PE firms often hire proven veterans for their portfolio companies at the executive level who have demonstrated their ability to grow a company in a particular industry or subsector.


In some cases, PE firms are even partnering with those individuals on a transaction and then hiring them to supplement the management team, either as part of their operating partner team or to replace some of the C-Suite executives in the portfolio company.


CFOs, in particular, are often replaced at portfolio companies.


“If there’s an underperforming asset, one of the first things they potentially look at changing out is the CFO,” Krygier said.


Singleton said PE firms have a strong understanding of the role of the CFO and the CFO talent that exists within their portfolios. He said PE firms take every opportunity to make the most of that talent.


“They’ll leverage that talent when it comes to doing add-on acquisitions, and they may even use it at the fund level for an acquisition in a similar or adjacent industry,” he said.


Firms and portfolio companies are also driving improvement by embracing data analytics throughout the deal process and in operations. Analytics applied during due diligence can provide a more complete picture of the opportunities and risks associated with the deal.


Advanced analytics also enable more effective monitoring of business performance. Meanwhile, predictive analytics help firms and portfolio companies make changes throughout their operations, including customer-facing and supply chain adjustments, that can drive revenue and efficiency.




Strategies to consider


Optimism has been building based on a greater level of certainty around the interest rate path and the potential for a decline in rates in 2024, said Greg Westfall, Grant Thornton’s National Managing Principal, Private Equity.

Greg Westfall

“Sellers’ expectations have become more realistic for current market conditions.”

Greg Westfall

Grant Thornton National Managing Principal, Private Equity


“I also think sellers’ expectations have become more realistic for current market conditions, and they’re not holding on to what valuations may have been based on multiples and market conditions back in 2021 as one data point for comparison,” Westfall said. “That, combined with the outlook for interest rates, should lead to an increased volume of deals in 2024.”


In the meantime, many PE firms are still holding and waiting. There are risks associated with holding PE assets longer in hopes of selling at larger multiples in the future. Singleton and Krygier also expect an uptick in deals going to market in the first half of 2024, but if everybody holds their assets and tries to sell at the same time, the volume of opportunities may give buyers an opportunity to negotiate lower prices.


Strengthening operational results in portfolio companies is a way to drive those prices higher.


“I think part of the reason that people are holding back is that results aren’t strong enough at this time,” Krygier said. “There’s cautious optimism about the economy, but people are not spending at the level that would drive operational results in a lot of these businesses.”


The bottom line is that selling at higher multiples at a later date requires a lot more than sitting and waiting. Leaders at PE firms and portfolio companies need to consider the following strategies:

  • Evaluate leadership. Do the executives at portfolio companies have the experience and skill to deliver performance improvement? If not, leadership may need to be passed on to executives with a track record of success in a given industry.
  • Transform technology. Data analytics and artificial intelligence capabilities are providing PE firms and their portfolio companies with tools to improve their results immediately. If you’re not investing in the right technology (and in cybersecurity to protect your assets), you’re probably falling behind.
  • Seek new capital sources. Obtaining traditional bank funding can be a challenge in the current environment. But alternative sources of capital can provide the backing needed to transform the original vision for an asset’s exit into something larger and more rewarding.

PE firm and portfolio company leaders may be able to achieve the multiples they’re seeking in the future. But they’re going to have to work to make it happen.



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