Leading Private Equity Strategies and Opportunities

December 9, 2022

Currently, the outlook for private equity is showing unprecedented growth after an already impressive decade of record-breaking growth. However, the world post-COVID looks quite different from a pre-COVID world, with new opportunities, massive amounts of liquidity, as well as crystallized specialization strategies to capitalize on those opportunities. Some new challenges like inflation and supply-chain disruptions are casting a small shadow on the PE market. However, hopes remain high as innovations continue to yield above-average returns and record-breaking growth continues to be the rule rather than the exception.  

The Outlook For PE 

By nearly all measures, the outlook for private equity firms around the world is unbelievably bright and clear. In 2021, private equity set several records across several key indicators in the industry. Global buyout deal value, for the first time in history, surpassed an average value of $1 billion. Additionally, PE has shown itself to be remarkably resilient to even the toughest challenges. During the dead heat of the COVID pandemic, PE was only dormant for about three months before the V-recovery began to materialize. In less than a year, PE averages had totally recovered.  

The trillions of dollars injected into the economy by the Federal Reserve have also provided unparalleled liquidity for PE firms and their projects. This surplus in liquidity has made debt cheap, and abundant, leading to even faster growth. The next decade shows no signs of slowing either. New technologies in blockchain, metaverse, machine learning, and more, are attracting a substantial amount of PE and VC investment.  

As the PE industry grows and matures, it is increasingly becoming more specialized–a trend that is likely to continue into the mid-to-long term future. Funds are beginning to focus on technology, finance, manufacturing, energy, and logistics along with other areas that would never have attracted attention in the past. Specifically, in the last couple of years, the funds with the greatest access to capital are those that have made the move to specialize. This is true in manufacturing, healthcare, and software, but especially true for any fund with an inclination towards technology. 

Best PE Strategies for The Coming Decade 

Many PE firms have chosen to focus on technology companies but have chosen different sub-specialties like manufacturing, medical devices, fin-tech, and more. Managers are increasingly realizing that a deep knowledge of their chosen industry is essential to successful investments. Technology is pervasive and transforming every industry creating a plethora of specialization opportunities. Those PE firms that have the requisite knowledge of all areas of a sub-market have an excellent opportunity to grow with quick and decisive movement in an extraordinarily competitive market. 

The past decade started the movement towards specialization. However, the COVID pandemic crystalized that movement, shifting the focus to hands-on value creation. Even within industry specialization, some PE firms have other core competencies, such as international expansion or growing regional leaders. All of these specializations coalesce into three main strategies for PE firms—buy-and-build, take-private, and carve-out acquisition

Buy-and-Build 

Buy and build strategies work well in industries in which PE firms have significant deep market knowledge and an experienced management team. Buy-and-build strategies consist of a PE firm purchasing a company, and then using its own expertise to transform and grow over the following 3 – 5 years. Transitions in buy-and-build scenarios can often be challenging so having the correct management with the right skill set is essential. Because of the many changes made to the companies being bought out, there may be a large amount of volatility. Apart from mere specialization, the PE firm must have a steady hand in order to not damage the value of the company being acquired. 

Buy-and-build strategies are also uniquely suited for hyper-specialized teams since the main play in the playbook is adding value through expertise and sweat equity. From the initial purchase in a buy-and-build strategy, PE firms can also acquire other players in the industry and create properties like vertical integration or hyper-specialization. The more that a company can acquire, build, and add value, the greater the return on investment will be. 

Corporate Carve-Outs 

Corporate carve-outs are often pursued by corporations when there is a department that is viable enough and large enough to become its own, independent entity. Different corporations may look towards corporate carve-outs as an ideal way to separate themselves from a small unit of the same business. Private equity firms may consider carve-outs as perfect opportunities for specialized investment, if the conditions are correct. 

First, corporate carve-outs are big enough to exist as an independent business. However, they are small enough to avoid being bogged down by the bureaucracy of larger businesses. Assuming the carve-out is divested for the right reasons, carve-outs are frequently talented at doing one thing very well to the exclusion of other activities. These scenarios can be especially attractive to specialized PE because they tend to be highly specialized and have experience working within a larger organizational structure.  

Take-Private 

While not a PE firm, tech mogul Elon Musk recently consummated his “take private” of the popular social media platform which used to be traded on public exchanges. Take-private deals like Musk’s deal with Twitter are hitting record highs in 2022 because of two main factors. First, there is a broad public perception that the “tech bubble” is a clear and present danger. Second, PE firms have unprecedented liquidity to dedicate to well-managed specialized companies. These discounted prices offer a perfect opportunity for PE firms to acquire companies in their area of expertise.  

Once these formerly-public companies are taken private, PE firms can replicate much of the same playbook expressed in buy-and-build scenarios. PE firms can add value through their expertise and management capabilities. Just as in the buy-and-build strategy, PE firms must handle these kinds of purchases with immense care. Take-private strategies can often be perceived as hostile takeovers which can cause a significant amount of turbulence within a company after the company is privatized. However, if managed properly, take-private moves can be quite profitable for PE firms. 

Conclusion 

The unique environment left after COVID and the tidal wave of liquidity has positioned the next decade for substantial growth within the private equity industry. Seraph, for its part, can play a unique role in specialized PE business acquisitions in the automotive, medical device, A&D, and other manufacturing industries. Once acquired by a PE firm, many companies undergo significant transformations in operations and value-adding activities. Thanks to our team of specialized operational consultants, Seraph can come alongside a new company and act as a support structure and begin adding value from day one. Our advisors are former management at many suppliers and OEMs and are experts in production and supply chain efficiency. Contact us today to schedule a discovery call, or see our case studies for more information.

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