The effects of the Corona pandemic are still noticeable, but private equity exit activities are now increasing significantly – after the disastrous first half of 2020, a ray of hope in this volatile time. It is therefore not surprising that PE managers are paying particular attention to and managing the key value drivers for company valuation. The digitalization of the portfolio company is in first place, but ESG (Environment, Social, Governance) conformity, taxes and working capital are also in focus.

A recent EY study found that half of PE managers want to realize a timely exit (max. 24 months) via an IPO or SPAC. The sale of the investment to another PE firm is expected to be 26%. Only 24% address the sale to a strategic market participant.

In order to achieve the target figures in company valuation, some PE firms are putting pressure on their investments. The aim here is also to achieve a faster exit. Let’s take a look at the individual factors in detail:

  1. ESG factors

If the portfolio company is particularly advanced in terms of ESG requirements and is also geared towards the future, this will have a positive impact on the valuation. An ESG premium will no longer be a rarity. The investment companies are explicitly looking for investors who are also willing to pay such a premium.

2. Digitalization

The equity story is increasingly driven by digitalization scenarios. In particular, the accelerated development of digitalization as a result of the Corona pandemic is seen as a key value driver, as, among other things, the operative business model and also the cost structure depend on the successful implementation of digitalization. Furthermore, new channels for customer acquisition can thus be opened up. The know-how to analyze and evaluate data will continue to grow in importance. Already, 50% of PE managers see this as a key corporate value driver in the next 24 months.

3. Taxes

Taxes can make profits fade and around 40% of PE managers see intercompany cash flows as particularly problematic for this. It is important to create the structural conditions for a sale so that the tax burden is kept within limits.

4. Working Capital

Immediate access to capital has become more important in times of the Corona pandemic. Some portfolio companies have also had to learn this the hard way. Effective working capital management is becoming increasingly important – especially in industries that have experienced disruptive change as a result of Corona. Transparency with regard to cash flow must be increased for the exit in order to enable a higher valuation.

From the perspective of PE investors, it is important to conduct a fast and reliable exit M&A process. The data basis (including due diligence documents) for this must be available at an early stage and in the event of an unforeseen opportunity. This also includes the fact that the growth planning is available in detail, as this will also significantly influence a company’s value. PE firms that have adapted can now particularly benefit from the prevailing market conditions.

How can starkpartners support you?

  • Our industry know-how (including Old Economy + Tech) and strategic understanding enable the worldwide identification of the right buyer groups, so that a bidding competition is guaranteed
  • Our know-how in company valuation identifies the value drivers of your company and supports the fact-based equity story
  • Our M&A process speed (data-driven and digitalized M&A process) will significantly accelerate the exit realization in terms of time

Please feel free to contact us! You can reach us by telephone on 02150 7058 210, by e-mail at office@starkpartners.de or on the web at www.starkpartners.de

Company valuation Digitalization Due Dilligance Know-how Private Equity Value driver Working Capital