The Exit Playbook: The buyer’s POV

0:00The question we ask ourselves as we're underwriting deals is why will the next owner be excited about this asset? A lot of technical teams aren't very good at building that story. The mistake that I see is sellers focusing too much on trying to sell that upside case and not being prepared to defend the backstory. I think you have to earn the right to get to the upside story. The mindset that I usually bring is, what would make me nervous if I was buying this business? And what you cannot afford is to pull a fast one on the buyers. The market is small and you will be found out if you are a selfish seller.

0:38Welcome back to Disruption Matters, a podcast miniseries produced by Private Equity International in partnership with Siri's sponsor Alex Partners that delves into the forces that are reshaping our world and how the private markets can not only address these changes, but emerge stronger from them. I'm Rob Kotecki, a deputy editor with PEI Group and your host. This is a six-part miniseries and we'll be releasing a new episode here on Spotlight every week. But if you'd rather not wait, you can listen to the whole series right now. Just follow the link in the description. If you already have a Private Equity International account, simply sign in or register for free to access all six episodes.

1:14For our fifth season, we've decided to focus on exits, given how few are getting done these days. We know it's not easy out there, and the margin for error only seems to be shrinking. So, we're offering a playbook of sorts from industry leaders on how they approach exits. But before we start discussing strategy or tactics, we wanted to lay down the foundational principle that will show up in every single episode. Some of you may be thinking you already prioritize exits. After all, they're the endpoint of everything that a manager does, from fund formation to fundraising to value creation to that, fingers crossed, IPO, or most frequently now, a strategic sale.

1:50Exits are the scorecard for private equity, which is why long-holding periods and new pathways like continuation vehicles make everyone's teeth itch. This year, we're here to share best practices and war stories on how people are putting points on the board. And they all begin with the same idea. Ready for it? Sitting down? Okay. Here it is. Take the buyer's point of view. Is that obvious? Yep. Simple? Absolutely. Easy? Not so fast. It's been decades since firms relied exclusively on financial engineering to drive returns, and there isn't a manager out there boasting about their ability to do that.

2:25Instead, they focus on building better businesses with controllable value creation and M &A. And all of that is certainly worthy. But private equity isn't about owning great companies forever. It's about delivering value over a finite period of time and ensuring that value shows up in the sales price. So that full effort of driving efficiencies, upgrading tech, M &A, and delivering synergies on those acquisitions should all be in the service of a vision that resonates with potential buyers. and that buyer's POV needs to be taken well before the ink dries on a transaction. Here's a helpful framing from Mike Hollander, a partner with GTCR.

3:01The question we ask ourselves as we're underwriting deals is, why will the next owner be excited about this asset? At GTCR, we follow a strategy called the leader strategy, where we are often working with executives to transform businesses, invest quite a bit in go-to-market capabilities, invest a lot in product capabilities, things of that nature. We're very focused on growth. If you look at our returns over time, the majority of our returns have come from EBITDA growth, either revenue growth or an increase in margin. Our perspective is if we do that really well, we can create a truly strategic asset.

3:40And hopefully that strategic asset becomes a must own for an acquirer, oftentimes the strategic acquirer. And so as we're working with the executives to create our underwriting plan, we're often saying, how do you make the company much more important to its customers through broader geographic breadth, broader product breadth, things of that nature. And in the lens through which we're doing that is, how does that make it more important to a buyer? And it's not just about imagining how the buyer feels about the upside. According to Alexis Underwood, a partner at the mid-market industrial firm, Winchurch.

4:14So the mindset that I usually bring is like, what would make me nervous if I was buying this business? Where would I expect proof? What would feel overly dependent on a few individuals? What claims would I pressure test the hardest? What parts of the story would I feel would be the most fragile? And I think it's really important to be honest about where the business is in its maturity journey. Like, I think most sophisticated businesses do not expect to be buying a finished business, but they do want self-awareness, credibility, clarity about what's been built, and clarity about what still represents an upside.

4:53And I think trying to oversell that maturity can really damage credibility in the deal. So I typically try and take the approach of here's what we professionalized, here's what still needs work, and here's why you as the next owner would be positioned to continue scaling the business. And I think that creates a much more believable story. And then your exit narrative strikes that balance of the company you're buying is institutionalized enough to trust, but unfinished enough to kind of excite that next buyer. We shouldn't underestimate just how important unfinished is to that sales pitch. Here's Alex Greenbaum, partner and head of active core infrastructure at EQT.

5:38One of the things that EQT really tries to do in our exits is leave something for the next buyer, leave some meat on the bone. So, you know, we really aren't trying to extract every single last penny of value. But when you're exiting, I think you also want to be able to show that new buyer. here are the five or four or three initiatives or opportunities that still exist that maybe we haven't gotten a chance to get to. I think that you can really get paid for those in your exit when you really show the buyer that they're doable and possible. And I think it gets buyers more excited. If there's nothing left to do with the business, then most buyers look at it and go, how do I create value here?

6:15What's in it for me? But if you actually have some really proven initiatives, be them new growth or cost saves or AI. And you can really demonstrate to somebody, you know, hey, we're working on these and they're good and they're quality and they'll create value. You can get paid for that without necessarily taking the risk on executing it all. And I actually think it just stimulates more excitement. And Alex clarifies how specific that upside needs to be to get buyers excited. Oftentimes when we've exited businesses, we've left the business with some existing growth projects still to be done. So they could be cost saves through some CapEx.

6:48They could be new assets hard to be built, but maybe where you have an MOU with a customer in place. And there are things that maybe there is some risk in the execution on them, but by building up that pipeline of specific, actionable, usually in the infrastructure business CapEx projects, we think that buyers get excited about those opportunities. And as long as they're de-risked enough, you can get good value for them. because of course the buyers will probably haircut where there's some execution risk, but you will get paid for some of that. But hold on. It's time to acknowledge that different buyers have very different perspectives and it's important to draw an exit map that leads to a specific kind of buyer.

7:26Here's Dorian Grossman, a former CEO and operating partner. If you are looking at selling to another equity sponsor, that is rather different than if you're trying to sell to a strategic because a strategic is going to bring in their own management team. They may transfer you onto their systems. They may want to integrate your business with the rest of their operational business. So it is rather different in that regard. And in some respects, it's a little bit easier to sell to a strategic where there is economic upside through synergies than when you're selling to another equity sponsor. So when I think about selling to another equity sponsor, the most important thing to have in place there is to be thinking, what is that equity sponsor going to be able to do with the business during their hold period?

8:15So when their hold period comes to an end, there's going to be some value that they are going to be able to derive from that relative to the value that they are putting out at the outset. And here's Neil Kalvilich, a senior managing director and head of portfolio operations at Centerbridge, explaining how his firm abused the buyer's POV at a granular level in its decision-making process. As you think about what add-on acquisitions do you want to do, you know, we'll talk about a buy box, what fits in the box, you know, what's the parameters of the types of companies that we might want to buy. Or as you think about, you know, big capital investments, whether that's capital equipment or a new plant that's going to create a new capability or new capacity, or even as you think about growth adjacencies, you know, and what products or what markets do you want to go into?

9:04Of course, those decisions are often driven by an ROI or a business case. But what we try to do is also put an exit impact into that strategic decision. It's like, okay, it might be a good investment. It might have a good payback. How is it going to affect the next buyer? Is it going to open our buyer universe or shrink it? Is it going to increase our multiple or decrease our multiple? And so I think if you build that into your decisions as you go, you can continue to sort of create value that's a good fit for the next owner. Neil saw the fruits of this approach with a manufacturing company that worked in the plumbing industry with about$500 million in revenue.

9:42And about halfway through the whole period, we stopped and talked to the investment bankers, talked to some consultants, asked who really is the buyer universe? What are they buying? Why are they buying it? And what we learned through that process is that the most attractive buyers and the most attractive multiples are really coming from a story around water. And actually, as we looked at our products and we looked at our customers, we're like, we very much are a water and flow control company. And if we can position ourselves like that, we're going to open the buyer universe. We're going to increase our multiples.

10:14And that actually led to decisions around like org structure in terms of how the business units were shaped. That led to a divestiture of one piece of the company that didn't really fit that part of the story. It led to us redefining that buy box that I was just talking about and really had some clarifying impacts on the strategic direction, all of it with that buyer's point of view in mind. Every sales process involves crafting a story for potential buyers. And as you might guess, that story needs to answer their priorities and concerns. Here's Chris Tabor, a partner and managing director from Alex Partners, discussing the three stages every story needs to address.

10:51Number one is the backstory. What have you already done and proven and de-risk for a future buyer? Number two, what is the world of what's possible right now with a modest amount of additional investment? And then number three is, what is the potential story in the future that requires a big bet? And I think the mistake that I see is sellers focusing too much on trying to sell that upside case and not being prepared to defend the backstory and what has been proven, what has been de-risked. And the part in the middle is anybody can afford to do the modest investment. It's the big bet. And yeah, that's the upside that the buyer is going to look to monetize for themselves, but they need to have confidence in the backstory.

11:39What is actually proven? Do they have a stable platform on which to build and take that bet? And I think preparing a portfolio company for that sale process, making sure that you're ready to defend that baseline is where I would like to see more investment of time resource on the part of the sellers. But Lane McDonald, the managing director for operations and strategy at Omer's Private Equity, makes a very important point about these stories. I think you have to earn the right to get to the upside story. We experienced this with a company where previous management team changed the sell story, you know, kind of the night before, right?

12:18Got into a room, a couple people and said, here's what the SIM is going to be. Here, SIM refers to confidential information memorandum. Which, you know, the rest of the management team, A, was not aware of and B, was scrambling to find any data to back it up. So buyers would ask simple questions like, what's your product line profitability in, you know, this organizational component of your business and they didn't have an answer because that's not the way the business had been run or organized, right? So, you know, we've done a complete 180 with this company and very much understand exactly where you're describing that the data has to be live, has to be clean, has to be easy and ready in order to prove out that backstory.

13:01Let's say that backstory is validated. What comes next? Only when the buyer is comfortable that they understand kind of what you are and where you've been, they understand where you are and where you're going, then and only then do you earn the right to have the conversation about how cool this could be in the future. And I think thinking of that sequentially and some of my best management teams, that's the way we talk about it, guys, let's make sure we've earned the right with the cleanliness and absolute slam dunk answer to any of the where have you been and where are you right now and where are you going in the near future answers are so clean and clear with data that, you know, we barely need to talk about it in the meeting.

13:41Therefore, the face-to-face conversations can be about that exciting future. But I don't think you start there. I think you have to earn your way to get there. So far, we've been speaking in the broadest terms about value creation, both what's been done and what there's left to do. But one element that might stay just out of the spotlight are company's tech capabilities. Here's Ricardo Basile, an operating partner and head of value creation at Premier. We acquired a business in Germany. It's a broker in a certain segment. We were able to preempt because the business when we acquired, we acquired it a couple of years ago, was very much single product, single geography, question marks about the time, and absolutely no technology.

14:24Just to give you an idea, we had twice as many Outlook users than people that work in the company because the system of record for the sharing of the information with the clients was Outlook. These guys were receiving documents, invoices, all the material that was needed to do what they had to through Outlook. And the sales organization were the three founders, nobody else. And therefore, no other buyers was able to get comfortable with what needed to be done. And as you might imagine, Ricardo's team got to work. we have built the value creation plan straight away to make the business multi-product or with a bigger number of products multi-geography through both organically and mna we now have and we are two years into the investment we already have 36 salespeople all fully ramped up the plan is to get 75 and through the fact that now implementing systems is a lot easier building new systems a lot easier we now actually have a fully functioning end-to-end back you know backbone IT solution that has replaced Outlook and Excel as the core part of the product.

15:32So now we're already getting inbounds from some of the people that looked at the business, loved the business positioning and potential market opportunity, but uncomfortable with what do we do with this. And now we're getting inbounds because it is a business that can be sold to the next guys. And here's Jerome Lawson, a partner and head of portfolio operations of private equity at Ambienta on how his firm thinks about the role tech upgrades play in exits. Given that Ambienta plays in the mid-market and tends to buy businesses, that it subsequently grows both organically and inorganically. One pattern that we bump into on a regular basis is that of the founder-led business, which is transitioning from, let's call it a very large SME to something like a small multinational operates, which operates in more countries, more geographies, more product lines than when we would acquire the initial kernel for the platform.

16:23That transformation is one which we support with a lot of work to help managers implement what we need them to implement to make the technology platform more robust. In other words, this takes real effort and focus. You need to find vendors that are appropriate for the particular business system that you're trying to strengthen, which are appropriate for the size of the business. So we've done this for a long time. What's changed over the past few years is that you now need to do this with a very fast evolving landscape of tools, which some of us use in our daily life, which we'll collectively refer to as, let's call it the AI enablement of our portfolio companies.

17:02and we have to be able to demonstrate that very often you've started the journey because let's be clear unlike the implementation of an ERP or a particular CRM system these are not journeys with a defined end state these are ongoing permanent journeys if you want to think about it that way in the world of businesses that are truly AI enabled you don't seek a clever ERP with better forecasting capabilities what you seek is an enterprise reasoning system and that requires very different skill sets, very different vendor ecosystems, and in the current environment, the ability to provide differentiated talent to companies which can't necessarily access this talent.

17:44I know it's shocking we went this long without mentioning AI, but the reality is that it can't be ignored. Every manager does need to place their portfolio company in the context of a future driven by AI. However, it's easy to forget that buyers aren't just interested in AI's promises, but it's dangerous as well. Here's Megha Calci, a partner with the cyber team at Alex Partners. I know AI is a really hot topic and I tend to come across so many companies and NGPs that are like, this kind of came out of nowhere for us. And we don't know how to govern it. We don't know how to secure it. What is the story that we can tell in an exit because we're already using it and different types of AI technology.

18:25AI is so huge. I mean, companies can be using computer vision, they can be using agentic AI, all different types of AI technology, but the security aspect of each one of those is nuanced. It's different. We all live in a world now where CIDR is a thing that matters to the boards of the companies we invest in. That's Jerome from Ambienta again. It was not the case 15 years ago. That evolution requires GPs to provide support, active support to portfolio companies in ways that are also differentiated. We have active partnerships in an ecosystem which stems from the world of defense and intelligence, and you want to bring those capabilities to support our portfolio companies.

19:05Now, let's say that a portfolio company has done some astounding feats with regards to tech capabilities and its AI evolution, but it's crucial that those accomplishments are part of the overall story a manager tells potential buyers. Here's Chris Satchel, the head of portfolio tech for CDNR. I'll tell you from a technical perspective. A lot of technical teams aren't very good at building that story. And so what I will always do is I will bring in great advisors to work with the technical teams to build that great technical story for the company, especially important in teams that have product development, whether it's hardware, software, or mixture, it becomes incredibly important.

19:42And it's amazing how much friction that can create with all the questions that get answered. And I've really seen it go from why these people you're bringing in are a complete joke. They're asking, they're disturbing my team, they're asking these questions. I don't get why. So like six weeks later when they see the story come, and it has to be real, right? Because it's not just a story. It really is a representation. Moving to, this was an incredibly valuable process. And I'll actually feel better about my business. I understand my business. I get why they were bugging me. There it is again. This idea that the story needs to be compelling and credible.

20:15It needs to be based on the lived reality, as they say, of the staff, customers, management, and market. But we would be remiss not to note the single most vital criteria for not just exiting one company profitably, but delivering returns year after year. Here's Matteo Stefanel, the managing partner and co-founder at Apis Partners, a UK-based firm focused on financial services and infrastructure. We are all repeat by design, by definition, we're all repeat exiters, right? That's what we do for a living. We invest, but we need to return the capital. And what you cannot afford is to pull a fast one on the buyers.

20:53You can't, and we're all very clever people, we can all, you know, present things in the best possible light, but there is a line between presenting in a good light and having buyers remorse at a later stage. You know, having buyers regret that they actually bought an asset from you. This is super important and what I cannot believe is that LPs, when they diligence us, when they are considering investing in our funds, they don't actually find out whether we're good sellers or bad sellers. They only focus on the financial return. But the market is small and you will be found out if you are, you know, a selfish seller.

21:31And naturally, Matteo has an investment that proves his point. Sun King is a provider of off-grid solar finance and they effectively provide in emerging markets solar with a financial inclusion element and a financial funding. So it's pay as you go. That's basically a high towards. And when we invested in it, the financial element was actually quite small. You know, they didn't realize that they were effectively a credit business and that they had tremendous credit scoring abilities that they had developed. They thought they were a power company. During our ownership, they became a credit business.

22:09And then we exited to GA. Here, GA refers to General Atlantic. And then GA grew the company and additional investors came in. And they recently had an additional round with a partial secondary. And I believe 6x, what we exited the business for. And we did a very healthy return when we exited. I was so proud of the fact that this business continued investing. I spoke to the guys that invested and they told me they were delighted to be investing. And I am just super happy because that basically says if you buy from Aetis or from a good seller, there's money to be made as opposed to count your fingers after you shake their hands.

22:54In a sense, that reputation gets calculated into the overall track record. And from a buyer's POV, what could be better than a firm that hands off companies that continue to outperform years after the sale? Yes, it is important to craft a story that addresses a buyer's ambitions and fears and leaves a runway for even greater things, and even tackles the tech issues. But none of that matters without the seller's credibility. In our next episode, we'll go digging into how to set up the exit before the ink is dry on a transaction. Thanks for listening. To make sure you get all the episodes from this season of Disruption Matters as they're published, subscribe to Private Equity Spotlight wherever you get podcasts or at privateequityinternational.com.

23:32This episode was produced by Natalie Novakova and edited by Eric Fish. Our music is Against the Clock by Rhythm Scott. I'm Rob Kotecki with PEI Group. See you next time.