The race for deals is on in private equity. Gone are the days when firms simply did due diligence, loaded on leverage and hoped for outsized returns after selling the company a few years down the road. Today, record-setting bids and unprecedented capital inflows have created an overheated environment that requires new strategies for those looking to stay ahead of the pack. Produced in cooperation with the Wharton Private Equity Club, this special report highlights the innovative ways firms are working to source deals, set themselves apart in an auction process and ensure performance once a deal is done. Also, industry specialists offer a close-up view of the debt markets and the hot energy market, which saw one of the largest-ever private equity proposals earlier this year.
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With so much money pouring into private equity funds, competitors for deals are able to match one another easily when it comes to price. Although valuation remains the most important part of any transaction, bidders need to come up with other, less tangible ways to set themselves apart. According to private equity experts, timing, sound strategy, operational expertise and a track record of successful deals are the new currency in a market where money is no object.
Faced with stiff competition, private equity firms are in a scramble to court potential targets with strategies ranging from signing up marquee-name rainmakers like Jack Welch, to hiring brokers, to relying on old-fashioned cold calling. According to experts from Wharton and private equity practitioners, such deal sourcing techniques can help firms stand out in the competitive market, but it’s the long-term approaches that are most likely to pay off.
For many private equity firms, one way to avoid lower returns is to install so-called “operating partners” — senior-level executives with industry expertise — at portfolio companies. Panelists at a recent Wharton conference and other industry experts say that operating partners with experience running plants and facilities, and rolodexes full of industry contacts, can boost profits and feed higher returns. Others warn that the strategy needs to be applied judiciously, and that the right fit can be hard to find.
Earlier this year, a consortium of private equity firms banded together to acquire TXU Corp., the Texas utility company, in one of the largest deals ever proposed. According to private equity experts, a new regulatory climate and innovative derivatives are drawing attention to energy. Meanwhile, other firms are making investments throughout the sector, including funds established to finance infrastructure and others dabbling in alternative energy.
In March, members of the Wharton Private Equity Club coordinated a roundtable discussion between four influential lenders to talk about the currently robust debt markets, trends in the sub-debt markets, the impact of hedge funds, and ways firms can differentiate themselves from the competition, among other topics.