Chapter 2: Understanding Our Client
Private equity (PE) groups and their portfolio companies are the cornerstone of our M&A and due diligence services. Understanding the dynamics of the PE market is essential for conducting effective research and profiling, as these groups operate with specific strategies and objectives that influence the type of companies they target.
Introduction to Private Equity Groups
At its core, a private equity (PE) group is an investment firm that acquires, or takes significant minority stakes in, companies with the intention of unlocking value and driving growth. These firms are not merely passive investors; they actively engage in the management and strategic direction of the companies they acquire, often with the goal of transforming them into more profitable and competitive enterprises.
Private equity firms typically look for companies that have untapped potential—whether that’s through refining business strategies, injecting fresh capital, or bringing in new leadership. These firms might also pursue a strategy of acquiring a platform company, which serves as a foundational business in a specific sector. They then scale this platform by acquiring additional companies, known as add-ons, within the same or complementary markets to rapidly expand the platform’s market presence and capabilities.
Targeting the Middle Market
Most private equity firms focus on the so-called middle market, which comprises businesses with annual revenues between approximately €10 million and €1 billion. Middle-market companies are often seen as having significant growth potential but may lack the resources or strategic direction needed to reach the next level. PE firms identify these companies as prime candidates for investment, believing they can significantly enhance value through operational improvements, strategic growth initiatives, and financial restructuring.
In addition to middle-market enterprises, private equity groups may also pursue:
Public-to-Private Transactions: Acquiring publicly traded companies and taking them private to implement significant changes away from the scrutiny of public markets.
Corporate Spin-Offs: Acquiring a specific division or subsidiary of a larger company, turning it into an independent entity with a focused strategy.
How Private Equity Firms Operate
Private equity firms operate by establishing investment funds. These funds raise capital from various investors, known as limited partners (LPs), which can include pension funds, endowments, high-net-worth individuals, and other institutional investors. The year in which a fund raises capital is referred to as its vintage year.
The private equity firm itself acts as the general partner (GP) of the fund, responsible for managing the investments and making strategic decisions. Once the capital is raised, the PE firm typically uses a combination of this capital and borrowed funds to acquire companies that align with its investment thesis.
A key aspect of PE investments is the holding period, which usually spans 4-6 years. During this time, the firm works intensively to improve the company’s performance, with the ultimate goal of exiting the investment for a substantial profit. Exits can occur through:
Secondary Buyouts: Selling the company to another private equity firm.
Trade Sales: Selling the company to a strategic buyer within the same industry.
Initial Public Offerings (IPOs): Listing the company on a public stock exchange.
Why Understanding Private Equity Matters to You
As a research analyst at PlainView Research, your primary task is to assist creating market maps that will help PE firms identify potential acquisition targets. These maps are critical tools for PE firms as they seek to expand their presence in specific industries. Understanding the nuances of the PE industry is essential because it directly influences how you conduct your research and what you focus on when compiling these market maps.
For more information on the private equity industry, take a look at this primer on PE.