Private Equity (PE) funds pay lower valuations for their acquisitions than corporate acquirers, suggesting that the general partners are either great negotiators, or that they are particularly skilled at identifying under-valued companies. Further, the valuation discounts enjoyed by PE compared with its corporate counterparts is larger when the deal size is smaller.
Due to having fixed investment time-frame, portfolio companies increase their sales, operating profitability, assets and leverage within the first 3 years of ownership, as compared to non-PE corporate peers. Smaller funds with AUM of $500 million or below focus on expansion as their top priority while larger funds focus on operational improvements and efficiency gains. Interestingly, larger or successful PE funds tend to be better at improving the performance of acquired companies than those PE funds with a less impressive track record, pointing to a “success breeds success” cycle. Also, larger PE funds are better placed to utilize leverage more effectively to achieve scale.
On the other hand, a corporate acquirer is usually prepared to pay extra goodwill in return for either potential corporate synergies down the road or strategic advantages to deny competitors of an asset. It will be interesting to find out whether those very portfolio companies are then bought over by strategic corporate acquirers from PE funds.
Source: London Business School