Key 2014 Considerations for CEOs Considering Private Equity Deals

Traditionally Private Equity buyouts have made money through a handful of value-creating levers:  Buying at a good price; using capital and leverage effectively; operational improvements; and exit management.

A 2014 poll by The Deal showed a significant and increased reliance on operational improvements versus use of leverage, buying low, and selling high.

80% of survey respondents indicated that operational improvements are more important now than before the financial crisis, and 50% indicated they start focusing on operational improvement (and spending due diligence funds) before signing a letter of intent.  Operational improvements could range widely: from product pricing policy, to cost cuts, to add-on acquisitions, to personnel changes/additions.

Most of these funds were also investing from their latest/largest funds, suggesting adequate PE management company cash flows to enable higher levels of pre-LOI research.

One other key insight from the survey was that 75% of respondents found management skills weaker than initial assessments, and a majority of the survey suggested a heavy reliance on operating partners and former CEOs for investment management insights.  Some of this sentiment could be reflection that operational improvement strategy and implementation is hard work.

Many new PE deals in the current market are highly priced at entry.  Given this, deals in 2014 are not just about levering the company and selling at a high price.  Private Equity is increasingly focused on running their portfolio companies differently.