How can PE Firms drive outsized returns when there have never been more competitors chasing the same number of deals?
Traditionally, private equity firms used the due diligence phase to explore insights, risk mitigation, and the identification of growth prospects and had several months to dig into a company while using the financials as the most essential tool or backbone of this analysis. Recent analyses from PitchBook underscore the critical importance of involving industry executives before and during the due diligence process to succeed in a crowded market and transition the due diligence focus to operational insight as the differentiated lever. We aim to delve into the indispensable role of this strategic collaboration and highlight how Lancor’s Advisory Business (”LAB”) leverages the expertise of industry leaders, reshaping the approach to due diligence and ushering in a new era of foresight in the investment thesis for private equity investments.
Mitigating Risks and Unearthing Growth Opportunities: Beyond recognizing opportunities, due diligence entails fortifying defenses against risks. LAB collaborates closely with its network of industry experts to see around corners and unveil potential pitfalls and sector-specific challenges. Early involvement of these experts empowers Private Equity funds to navigate unforeseen risks, thus ensuring a smoother investment journey and providing LPs with enhanced reassurance that their GP has a differentiated approach to creating value. Industry executives may also provide insight that encourages a PE firm not to move forward, saving tens of thousands/millions in broken deal fees. The other side of the coin is finding unique growth opportunities in an ever-competitive market. LAB tracks over 14,000 upcoming deals and utilizes its executive-led approach to unearth emerging market trends and growth prospects backed by decades of industry involvement.
Embrace the Advantage of Industry Leaders: Recognizing the vital role of industry executives in shaping investments is imperative for private equity clients. This strategy allows firms to elevate their investment approach, positioning themselves for success in today’s fiercely competitive LBO market. As Jamie Kim, head of business development at Gallant Capital Partners, notes in the Pitchbook article, “Reporter’s notebook: M&A dealmakers rely on structured deals to close transactions,” “If you are a good company with a defensible, strong balance sheet, it’s a crazy competitive market… we’re competing against 40 to 50 other bidders at the initial stage.” An industry executive may mean the difference between successfully bidding with a unique strategy and simply winning the auction by paying the last half turn of EBITDA!
A Case Study in Fire & Life Safety: To understand the value an industry executive can have across the PE diligence process we examine a previous success story in the fire and life safety (”FLS”) space. Lancor’s Advisory Business partnered with a former Jensen Hughes executive with 30+ years of experience in the FLS space. Initially, Lancor worked with him to assist a middle-market client in the due diligence of an asset coming to market. His insight led Lancor’s middle market client to pass on the opportunity, noting that the asset was significantly overvalued. Their insight allowed Lancor’s client to save on broken deals fees and the added difficulty of acquiring an overpriced asset. LAB continued working with the FLS executive, developing a thesis based on their understanding of the market landscape, customer base, and industry growth. Lancor ultimately facilitated a connection between the executive and Abry Partners, a Boston based Middle Market firm. Abry and the executive utilized their unique thesis and built Better Protection, a combination of Chicago-based Assurant Fire Protection, Complete Fire Pump Service, and Xtreme Fire Protection. They have since acquired three additional companies, with several more in process, and have grown from $0 to nearly $10m in EBITDA in the first year of ownership. These acquisitions were completed at single-digit purchase price multiples (close to 10 turns less of EBITDA and far below the industry average), allowing Abry a stable base of EBITDA to grow Better Protection.
In summation, industry executives have become an essential facet of the deal process. Not only can their insight prove invaluable when examining assets but can be further leveraged to create real, unique investments. Every decision is then enriched by authoritative industry insights, building true confidence in investments and peer-to-peer discussions with acquisition targets that lead to better acquisition multiples. At Lancor, we work with and place the best executives for top-tier private equity firms and their portfolio companies, building connections and leveraging insight to usher in the new era of executive-led investing.
“ACG Middle Market Conference: Navigating Structured Mergers and Acquisitions.” PitchBook News. Retrieved from: https://pitchbook.com/news/articles/acg-middle-market-conference-structured-mergers-acquisitions
“Goldman Sachs’ Lotfi Karoui on the Rise of Private Credit in Leveraged Buyouts.” PitchBook News. Retrieved from: https://pitchbook.com/news/articles/Goldman-Sachs-Lotfi-Karoui-private-credit-LBO
