Ongoing macroeconomic uncertainty has presented a number of both challenges and opportunities in the mergers and acquisitions (M&A) market in the United States in recent years. The market saw an impressive surge of activity in 2020 and 2021, due largely to a convergence of economic factors that were conducive to dealmaking, but activity began to slow in 2022 in the face of rising interest rates and inflationary pressures. However, even as challenging economic conditions persist, there is renewed optimism in the M&A market, particularly for strategic buyers and sellers who are willing to find creative ways to get deals done. For many companies, turning to private equity (PE) may offer a path forward.
The Role of Private Equity in M&A
By investing equity in M&A transactions, PE firms can help drive growth, further operations, and create value for buyers and sellers. But common misunderstandings about the role of a PE firm in M&A transactions may lead some businesses owners to overlook PE when looking to sell their company. “There is sometimes a misconception that the objective for PE firms is to drive up a company’s margin and cash flow, then sell the company for the highest dollar. But really, the goal of PE in M&A is about working collaboratively with a business to enhance its value, help it grow, and continue to drive success,” said Larissa Rozycki, managing director at Harris Williams. “Having a strong relationship with the PE community can be a very valuable resource for businesses interested in M&A opportunities.”
Rozycki added that achieving success in the investment hinges on alignment between the seller and the PE firm. “It’s incredibly important that both parties are aligned on the vision of the business going forward,” she said. “The PE group needs to be on board with the seller in terms of the strategic direction for the company, and the seller needs to be willing to rely on PE advisors to provide unbiased perspective when appropriate. It’s not always the highest dollar value that wins the deal – it can come back to a lot of intangibles that PE can bring to the relationship.”
What PE Firms Look for in an Investment
Even as the M&A market operates amid an uncertain economic backdrop, deals continue to take place. Business performance, which may be impacted by elevated interest rates and inflation, is not the only factor that PE firms may consider when evaluating potential investment opportunities. What may carry more weight, from a PE perspective, is having strong management at the helm.
“A company that has a compelling story and a leadership team who understands what’s going on in their business can be a great candidate for partnering with PE,” said Michael Rost, managing director with PNC Riverarch Capital. “Part of demonstrating strong leadership includes effectively managing a company’s cash flow. This is important in any economic environment, but especially in a setting when interest rates are high and great care and creativity are being exercised in the way PE deals are structured.”
The willingness of a CEO or CFO to delegate responsibility to their leadership teams is another management aspect that can play a role in attracting PE investment. By allowing PE firms to develop relationships with their team members, rather than serve as a central point of control, CEOs and CFOs can help encourage buy-in to a shared vision for success, which can make a difference in executing against a strategic plan leading up to and following a sale.
Collaboration Is Key
Throughout the life cycle of an M&A transaction, collaboration is the key to achieving a successful outcome, and this can be especially important when preparing for a sale. “Involving external advisors, whether that’s in an investment banking or a legal capacity, is essential. The earlier a business owner has outside advisors telling them how others will perceive their company, the more time they have to address and prepare diligence for it,” said Rost. “These advisors know what a company needs to do to put its best foot forward, and they can also help provide information in a way that is appropriate for the investor to digest.”
He added that external advisors can also provide critical assistance in facilitating interactions between groups. “There’s a natural opposition between buyer and seller, and transactions can be stressful. Advisors can help by reminding all parties that they are going to be collaborating going forward and everyone needs to understand the motivations of the other side. We’re all trying to get to the same place.”
“From an investment banking perspective, we can be a tremendous resource in helping our client through the sale process. But it’s ultimately about building a relationship,” said Rozycki. “It’s important for businesses who are looking for a PE investment to identify a firm that shares their strategic vision and will work collaboratively with them to achieve it.”
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PNC offers merger and acquisition (M&A) advisory services through PNC Riverarch Capital partners with great companies and exceptional management teams to accelerate growth while preserving company culture and legacy. For more information, reach out to your relationship manager or learn more here., a global investment bank specializing in M&A advisory services.