Is a Private Equity Partner Right for You?

Exploring all options is a healthy exercise, especially as part of a yearly planning process.

Thinking it may be time to partner up? Maybe take some chips off the table?

Don’t feel like the Lone Ranger. Deloitte polled more than 500 middle market executives and found that nearly 60 percent of them either expect to (or would be willing to) pursue a private-equity partner.

Many heavy-duty guys have only a passing idea of the growing importance of private equity as a source for growth — not just an exit tool.

According to Baron Carlson of AEA Investors in New York, interest in and by distribution has grown back to record levels.

“In 2014, we’ve seen significant interest in distribution from private equity players competing with one another for quality deals — even greater than in 2007, our benchmark peak year,” Carlson writes.  “The abundance of capital on the sidelines relative to the number of available opportunities has resulted in elevated valuations and a continuing strong market for business owners to explore a liquidity event.”

What Is Private Equity Looking For?

While there is no universal, ‘cookbook’ recipe for a great candidate, the following seem to come up in deal after deal:

  • Management team with strategic vision.
  • Leadership position in important product categories.
  • Balanced organic and acquisition growth story and plan.
  • Proven reliability (demonstrable, tangible value proposition for customers and suppliers).
  • Operating performance metrics at the higher end of best-in-class publicly-traded distribution companies (same day/next day delivery, fill rates, customer spend share, supplier product share, purchasing power, etc.).
  • Meaningful MRO / aftermarket content with supporting services offering.
  • Channel leadership and diverse geographic or vocational presence.
  • Strong free cash flow performance through down cycles.
  • Minimal exposure to commodity price volatility (of inventory de-valuation risk).
  • Profit margins, ROIC/RONA and inventory turns at the higher end of the sector.
  • Strong and/or proprietary systems such as CRM, MIS, customer interface, established E-commerce platform, etc.

“While many business owners remain hesitant to explore all the possibilities with private equity, it is important to understand the benefits of exploring a partnership transaction in today’s strong market. The reality is, here at AEA we are more interested in investing in business owners seeking to grow their companies versus those looking to leave,” Carlson says.

How Should a Company Prepare for Private Equity Investment?

 Before a company considers private equity options, they need to be prepared to very clearly answer the following three questions:

  • Specifically, how does the company plan to grow?
  • What is the plan to compete and take market share?
  • How do customers view the company relative to the competition?

“Where we have invested successfully in the past, it has been with companies that understood their marketplace extremely well and developed competitive advantages in how they serve and support their customers,” says Carlson. ”They have had a long established plan to sustain and build on their growth, either through acquisition or by organically growing their business.”

Common Mistakes Made When Seeking a Private Equity Partner

Often (especially in the heavy-duty business), owners become too focused on operations at the expense of strategy. The strongest executives find time to develop a strategic plan, execute it, and think more broadly about market opportunities.

Admittedly, it’s hard to simultaneously operate and plan, but that’s why having a strong management team is so critical to running a successful industrial distribution business long-term.

“Another shortcoming we encounter is the business owner who knows everything about their own business, but lacks a true understanding of their competition. Companies that are successful over the long term pay close attention to the competitive landscape,” says Carlson.

Beside Dollars, What Can Private Equity Bring to the Table?

According to a recent study by KPMG, where private equity made a significant contribution to the rise in company value, it was said to be through the following means, in rank order:

  • Provided capital to grow business
  • Optimized business plan
  • Removed constraints on management
  • Brought in outside operational expertise
  • Other (including dealing with banks)

Obviously, you need to really think about all aspects of bringing in a partner. That same KPMG study suggested the following especially effective ways of working together after the excitement of the deal dies down.

Personally, I want a PE partner that will:

  • Have a very open and honest dialogue — especially with regard to exit strategy.
  • Have either operational understanding or access to advisers with relevant experience.
  • Allocate sufficient time and input to the strategic planning process.
  • Spend more time on the business, not just at board meetings.
  • Truly understand the business, the competitive landscape — not just the numbers.
  • Cut back on the number of performance indicators and quickly identify the key levers.
  • Have fewer private equity professionals and more independent directors on the board.

This post does not pretend to cover the entire spectrum of issues that may arise. It is simply an admonition to qualify, not just quantify, the pros and cons while considering a private equity partner.

If you want to discuss any of this specifically as it applies to your company, call me.

Bill Wade is a partner at Wade & Partners and a heavy-duty aftermarket veteran. He is the author of Aftermarket Innovations. He can be reached at

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