One of the critical questions an entrepreneur needs to ask when seeking an investment by private equity is: “What is the exit strategy?” The answer to this question can create a lucrative “second bite of the apple” if the entrepreneur and financial sponsor approach an exit as a win/win. Here’s how.
At Driehaus Private Equity, we employ an operational approach with portfolio companies that creates organic growth and positions them to be acquired by a strategic buyer. A strategic buyer can be ideal when the acquisition creates enhanced value for both parties. This occurs when the financial analysis shows how the post-acquisition company “whole” is greater than the sum of its parts. To get there, we focus on improving core operating systems, guided by lean operating principles and facilitated by a proprietary measurement process.
Here are three ways Driehaus Private Equity positions portfolio companies for eventual sale.
One of the first conversations we have with portfolio executives and entrepreneurs involves the collective mindset needed for growth and alignment. Increasing value requires a willingness and ability to effect change in the organization along a focused set of growth initiatives. Driehaus has an extensive set of tools which were developed to provide structure with a checklist mentality to heighten transparency, focus and accountability.
Combining a mentality of change and growth with structured operational tools allows DPE to work closely with portfolio executives and leaders to implement needed operational changes necessary for growth. The pace of growth needs to be managed as well. This is one of the top tier responsibilities of management and the highest and best use of their time.
Our approach works. For example, DPE played a critical role in getting portfolio company focus4media to a level of performance that made it a strong acquisition target and growth opportunity for Mood Media, a global leader in that industry. We acquired focus4media in April 2015 and the company experienced strong growth as we worked with management to improve operations, support new products and expand the sales force. The Mood Media acquisition demonstrates the real value that was created.
One of the most important roles of a private equity sponsor is to raise its visibility among acquisition-minded industry strategic sponsors. At DPE, we work hard to reinforce our presence and credibility with industry related buyers, primarily as a benefit to our portfolio companies. These buyers know that a DPE company is well run and growth-oriented. Both focus 4media and Syntac (two portfolio companies sold in the last year) were acquired by strategic industry participants because we are active industry participants.
Even if and when a portfolio company becomes part of a larger organization, as contrasted to a capital restructuring, all the work and effort put into a company creates lasting value. This is good for the entrepreneur and CEO because a successful exit enhances their reputation and opportunities for future endeavors.
Our approach at Driehaus is designed to create lasting value, as opposed to looking for short-term gains that dissipate once the sale is complete.