How Fuld & Company helped a middle-market private equity client to ramp up their deal origination and due diligence activities
Posted by | Fuld & Company
A longstanding mid-market private equity client that was still harvesting its third Fund, obtained the first close for its fourth Fund. The new money was mandated to invest in niche sectors in the Business Services, Consumer, and Industrial and Manufacturing sectors. Although we were already engaged by the client to evaluate exit opportunities and provide other portfolio management services on its third Fund, the client sought buy-side support to deploy its new Fund.
The Fuld & Company Buy-side team worked closely with the client’s investment team to ramp up deal origination and due diligence activities. The task was straightforward; we needed to quickly find a company that fits well into the Fund’s overall objectives, and then help acquire it at the right price.
In the current highly competitive and choppy private equity market, the winners will be the firms that maximize the value of their portfolio companies and deliver value creation at a portfolio level. Therefore, it is essential to comprehend the overall buy strategy to identify value levers for acquisitions in a particular niche sector.
We divided our process into 3 step process
Opportunistic Sub-Sector identification
Our buy-side research team conducted in-depth sub-sector research to identify under-leveraged sub-sectors with lucrative investment opportunities within each focus sector. The goal was to recognize sub-sectors with sizable market size and growth, low private equity penetration, and a high level of fragmentation. Next, we presented to the client an insightful, data-driven report, including future estimates, outlining the shortlisted sub-sectors, describing why and how they fit into their Fund’s strategy.
Shortlisting the targets
Once the sub-sectors were shortlisted, we identified the best potential targets for acquisition. Screening criteria included geography, client penetration, management team, current investors, capital raised, minimum revenue/EBITDA preference, and other considerations. In several cases, we scanned social media to verify a target’s reputation and client/vendor reviews.
We put together industry and competitive landscapes for these shortlisted targets to ensure the opportunity and probability for significant growth for the duration of the Fund’s tenure.
While most of the sourcing was done internally, we extended our search to also include investment banks operating in the space. We evaluated teasers received from IBs, reviewed NDAs and summarized CIMs.
Unlike sell-side diligence, which focuses on pre-empting potential buyer questions to secure a successful transaction at the highest price possible, the buy-side analysis aims to assess the target financial profile and fit and close the deal at the best price for the PE firm.
Financial analysis includes profitability metrics, cash flow, debt capacity, and ultimately the valuation, yielding the maximum ROI. It is also imperative to assess the right strategic and operational fit, since on face value, a company might seem like a natural addition to a PE’s portfolio. A thorough understanding of the seller’s operational and strategic considerations will help reveal how operational costs and decisions affect the bottom line.
Our buy-side analysts worked closely with the investment team to perform in-depth financial analysis and build detailed and dynamic operational models. Based on the value creation thesis, the models were extensively used to quantify growth, potential synergies/cost savings, and the resulting profitability and EBITDA enhancement opportunities. In addition, we simulated multiple scenarios using the models and assisted in developing the initial business case, which also served as the foundation for the post-closing integration plan. These analyses were eventually translated to ballpark valuations using Leveraged Buyout (LBO) and Discounted Cash Flow (DCF) analysis and relative valuation techniques. This enabled the Fund to get a realistic estimate of the best- and worst-case returns on their potential investments.
The support provided by Fuld & Company allowed the Fund to expedite deal origination and due diligence activities. The analyses were extensively used in the investment committee memorandums, enabling the Fund to deploy over 50% of the capital in just ~1.5 years. The Fund continues to leverage our assistance in sourcing, assessing, and closing potential acquisition opportunities to make high-yielding investments. The fact that the fourth Fund valuation growth has outshined the previous fund results is the cherry on top.