Origination: perfecting processes

With many private equity firms breaking from traditional approaches and seemingly more players facing battles in competitive processes, is it simply a question of price or are there other factors that will seal the deal?

"The top price doesn't always win the deal, but probably does most times," says Jon Hustler, co-founder and partner at Clearwater International. "We talk to owners about the deliverability of the offer, what warranties they might have to give to the buyer, whether the new owners look after the management team and what the longer-term plans for the business are, as well as a number of other softer issues."

Kaido Veske, the co-founder of Baltic GP Livonia Partners, agrees price is not always the be-all and end-all. "No private equity fund wants to say capital is the only thing they offer," he says. "Money management is a people business. If you can go and look the people in the eye and communicate your vision in a clear and trustworthy way, that's also a way to win dealflow."

Beyond capital
In today's environment, carrying out a differentiated approach is vital. The rise of the operating partner has been prolific in the past decade, with many GPs using advisers and entrepreneurs as a way of improving bids. EQT strongly believes in the value of industrial advisers, says deputy managing partner and head of EQT Equity Christian Sinding: "It is important to have industrialists on board. We have had that since day one and we work with them throughout the process."

However, Livonia's Veske plays down their value: "People love incorporating senior advisers and industrial advisers. The majority of senior advisers are probably people who are already in their late 50s or 60s, who are just not going to be as motivated to do the crazy amounts of work for you as you have advertised they will do. It will help a bit with sourcing, but it can't be an exclusive status for you to bank on."

Sweeteners are another way of making bids more attractive. Performance payouts or owner buy-ins may be included in deals to allow sellers to capture some of the value GPs are hoping to create post-buyout.

In the same vein, keeping the company's founders on board through incentive packages can help, with many owners wanting to ensure their business continues to grow and is taken care of properly. According to Hustler, founders are more likely to have an emotional approach to the process. "[Founders] regard it as being their business and they want a buyer who will continue it and continue to invest in it, look after the people and maintain the name. But that can quickly change if a bidder comes up with the right price."

In contrast, corporate sellers are less likely to be emotionally involved: "They are more dispassionate," says Hustler. "While they might pay lip service to having an interest in the future of that business, fundamentally it's about price."

No time to lose
A quick process is often an attractive prospect for sellers. Says EQT's Sinding: "Time is the enemy in a deal, as performance can move and someone may want to renegotiate. There's always a risk. The ability to execute quickly is an advantage."
As such, financing plays a crucial part in winning deals. Having debt in place removes worry for the seller and some GPs opt to pay up front and secure financing after the deal is closed. Indeed, Dunedin is one of a handful of private equity firms that has a debt-bridging facility, which allows it to underwrite the entire capital structure of a deal.

Getting to know a company, its management and the industry may also prove decisive. This may be more achievable in smaller, less competitive markets, where GPs have more time to track a company and gain a better idea of whether it can deliver the necessary performance figures. This approach is also possible when buying larger companies as 3i's acquisition of Apsen highlighted.

For some, winning a deal begins even before the asset has been put up for sale: "There are always a lot of good companies for sale, but the great companies never arrive at your doorstep," says Veske. "You have to arrive at theirs, years before there is a deal. That's also how you create a history and an advantage for yourself if there is an auction process in the end."

Corporate finance conundrum
The role of advisers is often brought up when discussing deal processes, as the relationship between corporate finance and private equity can seem insidious at times.

While GPs point out that corporate financiers running broad auction processes can drive prices higher for candidates, most prefer the involvement of an intermediary to co-ordinate each party, select suitable candidates and support the sellers during the typically intrusive due diligence stage.

On the other hand, concerns are raised from time to time that the relationship between corporate finance and private equity is based too much on reciprocity, rather than merit. Rumours suggest intermediaries will offer assets to GPs in return for running sales processes when those GPs are looking for advisers to lead an exit.

However, the consensus is that the private equity industry is professional and decides on merit, though you will have a better relationship with some bankers and advisers than others. And while favouritism does happen, it is not appropriate or acceptable and is cracked down on when it does occur.

"It's up to the owners to decide who they sell to, and what price they sell for - not the bankers," says Sinding. "The bankers are intermediaries and are incentivised to maximise price, but an owner who makes a wrong decision because a banker tells him to is a weak owner."

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