The COVID-19 pandemic and global economic lockdown has seen merger and acquisition (M&A) activity plummet. From $3.9 trillion in global takeovers in 2019, announced deals plunged 51% in the first quarter in the US according to Refinitiv. Uncertainties in the business and capital markets have led to buyers delaying or cutting back on their acquisition plans. But with crisis comes opportunity. Those able to navigate the new risk landscape may find compelling deals on the other side of the pandemic. Now more than ever, expert help with strategic planning, modelling out “what if” scenarios when the world frees up from lockdown, and preparing better for post-acquisition merger integration can help owners succeed in acquiring or being acquired.
As the incredible success of private equity over the past couple decades has made clear to many aspiring company owners and investors, if you can find and acquire a decent company, its possible to earn great returns. This has fueled a new class of individuals seeking to launch their own search funds. What exactly is a search fund and how do you become successful at it? Let’s explore.
The Stanford Graduate School of Business Center for Entrepreneurial Studies explains search funds this way: “The model offers relatively inexperienced professionals with limited capital resources a quick path to managing a company in which they have a meaningful ownership position.”
Inexperienced professionals? Limited capital resources? It doesn’t exactly sound like a recipe for success.
But it can be.
It might be a challenge to develop a new medical facility in the United States. But it’s nothing compared to developing one in sub Saharan Africa.
That’s what Dr. Rodney Armstead learned on his 5-year quest to open the first specialty practice and minimally invasive surgery center in Accra, the capital city of Ghana.
LuccaHealth Medical Specialty Center has two campuses in Accra. One opened in November 2019 and the other in February 2020. Together, they will offer 11 specialties and minimally invasive (laparoscopic) same day surgery when LuccaHealth is fully operational at the end of 2021:
It’s not uncommon for private equity portfolio companies to double or even triple growth thanks to merger or acquisition. Albeit positive, rapid growth brings new operational challenges that can stop the upward momentum in its tracks. Interim executives bring the expertise needed to enable growth on a massive scale.
“Sometimes a business will start with $40 million in sales, and through acquisition will be two or three times that size. Often that creates an environment where you need to add to the management team, whether that be the CFO or the CEO,” said Forest Wester, a Partner at Trivest Partners that leverages interim executives to enable growth.
Private equity funds use interim executives in a variety of scenarios. However, these scenarios are typically problems that need to be solved such as the abrupt departure of a CEO.
What do you do when your fund does a great job buying 5 divisions of a big publishing company spinning off assets, only to find one of the divisions starts going sideways?
First, you give the division some time to right the ship on their own.
Unfortunately, for one multi-billion dollar private equity fund, this strategy didn’t work… and the fund gave the CEO four years to get it right.
That’s a lot of patience.
The overriding, ever present recurring theme of PE fund managers is dealflow. What keeps a PE fund manager up at night? Dealflow. What gets a them up in the morning? More deals. What drives them to stay connected and answer the phone while on vacation? That would be more deals.
And dealflow’s brother is price. As dealflow becomes more pressured and harder to come by, prices of companies go up. And seemingly everything gets shopped since fund after fund are grabbing for the same opportunities.
Many private equity funds hear the words “interim executive” and think the only application is turnaround or short-term fill-in. But for PE funds seeking a great return, they look to interims for their unique abilities to build and transform companies.
Here are six major use cases for interim executives in PE-owned portfolio companies:
Interim Executives in Diligence
Most funds hope to spread their wings – work beyond industries where they’ve already had success, by looking at new industries where acquisitions may cost less and produce higher returns. The further afield they go, the more they need expert leadership removed from prior operating teams.
According to a Harvard Business Review report, the failure rate for mergers and acquisitions sits between 70 and 90%. Even before the deal closes, it’s not uncommon for deals to unravel.
If the odds can be overwhelmingly negative, what can you do to increase your chance of success if you are looking to sell your business?
The best private equity funds talk about backing great CEOs, entrepreneurs, and management teams. But in the lower middle market ($2-$15 million in EBITDA), what’s a private equity fund to do when the company they are acquiring lacks resources and the management skills to earn great returns?
What if serious talent doesn’t extend beyond the CEO or founder?
Douglas Song, co-founder of Prodos Capital Management and an investor in lower middle market companies, says that “there’s always a way to think creatively and unlock value in any lower middle market company.” He especially finds common themes among companies where entrepreneurs or families have built a great business over time, but are lacking in certain areas where partnering with additional resources will help them take the business to the next level.
“No duty the executive had to perform was so trying as to put the right man in the right place.” -Thomas Jefferson
Private equity fund managers aren’t in the caretaking business. They are in the business of sparking change within companies that can be grown or turned around to produce big returns for their institutional investors. And that change can’t be just incremental. Fund managers strive to be in the business of transformation.