Anyone who keeps tabs on financial news may have seen some interesting information published by Pitchbook over recent times.
Pitchbook were keen to highlight how significant private equity firms have proven to be within retail businesses over the last few years. However, something they also strongly focused on was the fact that the trend seems to be slowing down – not as many private equity firms seem quite as keen in backing retail propositions.
It’s at this point where it’s interesting to look at some of the key points in which private equity firms scrutinize whilst piecing together a deal.
In a recent interview, the CEO of Sun Capital, Marc Leder, revealed that there were several prerequisites a business must meet in order for them to be a viable proposition for the private equity giants. Let’s quickly take a look at some of these:
The business isn’t reaching its potential
Firstly, there’s little point in investing in a business if it’s already reaching its maximum potential. This is the first point Leder made in his interview and said that there have to be obvious ways in which the business can improve and achieve more.
It needs to be a business that can benefit through operational expertise
Something that a lot of private equity firms pride themselves in is their operational abilities. In other words, they are able to step into a business and implement changes based on their knowledge and infrastructures they already have in place.
Similarly to above, if there’s no obvious way that a business can be benefited operationally, it’s probably not going to be considered by a company like Sun Capital.
It needs to be a market leader
Just because a company leads the market doesn’t mean to say that it’s reaching its full potential. In the case of Sun Capital, they prefer to invest in companies which are leading their sector and are proven to be important to their customers. It’s here when they can step in and make the difference which we have spoken about.
However, something that Leder didn’t cover in that interview was when a company doesn’t become a viable proposition for Sun Capital.
This brings us back to the Pitchbook statistics, which claimed that the retail market for private equity companies was slowing.
Sun Capital have since responded with their own outlook on this. Even if a company easily satisfies the three requirements that Leder set out in his interview, they can’t do anything to guard against high valuations.
In other words, even though a private equity firm might be able to add value to a company, there becomes a valuation which means that it’s just not feasible.
This appears to be the main reason for the slight downturn in the amount of private equity-backed deals which are going through for retail businesses right now. Nevertheless, Sun Capital have remained defiant and insist that it’s still a market they will look at – as their huge portfolio shows.