Capital Markets

Private Equity Firms Seek Finance Savvy

Buyout companies are more and more willing to team up with corporations that bring industry know-how and operating abilities. They also wouldn't mi...
The McKinsey QuarterlySeptember 16, 2004

The current private equity landscape can offer opportunities to CFOs and other corporate strategists. Because of the surplus of capital in the current market, corporations looking at acquisitions are seeing more and more competition from a broader set of financial buyers in addition to the anticipated strategic buyers. However, buyout firms are increasingly willing to partner with corporations that bring complementary industry knowledge and managerial and operating skills. These partnerships create new strategic opportunities for public companies — and might even reassure some shareholders that they are investing alongside smart money.

What’s more, corporate buyers often bring assets that can be combined attractively with the target business. While preparing a bid for a technology company during a recent auction, one corporation was approached by four buyout funds, for example, each with varying complementary assets and strikingly different proposals for alternative forms of partnership.

Many buyout firms also have increased their interest in private investment in public equity (PIPE). These investments are typically minority equity or convertible stakes in public entities that can in some cases be linked to financing for specific acquisitions. PIPE investments can also be part of an attempt to broaden the available set of opportunities beyond private deals, to get ahead of the competition for privileged access to divestitures of nonstrategic assets, or even to involve leveraged buyouts of complete public entities. Corporations will increasingly see buyout firms positioning themselves as potential minority shareholders and strategic partners, but CEOs and CFOs should consider carefully the true cost of such capital infusions from these players compared with the alternatives.

Finally, corporate executives should be prepared to encounter more competition from buyout firms for top managerial talent. Not only will buyout fund managers seek to add operational and strategic expertise to their ever-broadening teams that evaluate, execute, and monitor investments but also to offer more compelling financial incentives for such talent to accept positions in the turnaround and ongoing management of portfolio companies. (For a broader discussion, read “Private Equity’s New Challenge.”)

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