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PE Firms employ complex models to project potential returns under various economic scenarios to help determine the value they can afford to pay for a company and still meet their expectations of their LPs.
The process starts with a review of past financials to normalize the results (take out the unusual and non-reoccurring items). Next, realistic assumptions are made and various methods are employed to determine an enterprise value. Often the enterprise value is expressed as a multiple of EBITDA (earnings before interest, tax, depreciation and amortization) without cash or debt, and the final close price is adjusted for cash and debt at that time. Larger companies tend generate higher multiples because they have more exit options and are generally safer investments. Expected returns and exit strategies Most PE Firms are looking for an Internal Rate of Return (IRR) of 20% or more if possible. They must be able to see a plan where this can be achieved through a combination of organic growth, acquisitions and financial engineering for the life of the investment. Portfolio company holding periods vary by PE Firm but normally range from 3-7 years. Some firms with a permanent capital base (e.g. family offices/trusts) will hold companies for 10 or more years and only sell when the investment has been optimized. Exits can be through IPO's, sales to strategic or industry players, private sector sales or sales to other PE Firms. Deal Flow Deal flow refers to the acquisition opportunities presented or sourced by the firm. Typically a PE Firm will look at 50-100 potential investments before making a single addition to the portfolio. Many PE Firms are now using Industry experts to help originate deals and improve the percentages of deals that get completed. Feel free to contact us anytime to discuss your options and whether a PE Firm would be the right fit for your business. Or you can take our PE recap Suitability Questionnaire, and we will follow-up once completed. |