The Exit Playbook: Starting with the exit journey in mind

"Start with what you really want in terms of your exit and then work backward from it." "What we find is that, especially in the current environment, quality wins." "What will a buyer pay a premium for in four five years and what will they discount?" "Today, I think buyers are a lot more skeptical and are more operationally sophisticated." "Welcome back to Disruption Matters. A podcast mini-series produced by Private Equity International in partnership with Siri Sponsor, Alex Partners, the delves in the forces that are reshaping our world and how the private markets can hardly address these changes, but emerge stronger from them." "I'm Rob Kitecki, a deputy editor with PEI Group and your host." This is a six-part mini-series and we'll be releasing a new episode here on Spotlight every week. But if you rather not wait, you can listen to the whole series right now. Just follow the link in the description. If you already have a private equity international account, simply sign in or register for free to access all six episodes. For this episode, I have to admit something. I hate when people ask if I like surprises, as if there are some kind of neutral phenomenon. If I'm Wily Coyote, you'll forgive me if I don't trust them. But if Ryan Gosling knocks on my door to hand me three million dollars, yes, I'm a big fan. We launched this podcast because we've all been wrestling with some nasty surprises for years now and private equity investors haven't been spared. That diligence checklist for new investments keeps growing, including everything from supply-changes options to wildly fluctuating energy prices. There seems to be a nine-sense that if that checklist is long enough, it can predict the future. Unfortunately, there's no crystal ball. And there's every chance that the next Black Swan event will still catch us off-card. That's why we're here to share the general principles that will minimize the impact of any such shocks. This season we're focused on exits and offering a playbook for how they get done these days. And in this episode, we'll be taking a look at how to center them during the diligence process. Now, no one's suggesting anyone drafts an investment case without mapping an exit, but we'll be discussing how to improve the map to be as reliable as possible. And yes, no matter how detailed that map is, the terrain may still change. But in an ideal world, the map's still accurate enough to guide the manager out of the wilderness. I know this will shock you, but we'll be starting at the beginning today. Here's Sarab saying a partner at Alex Partners. Backward from it. And then bringing a lot of a realism along the way. Right? What type of a multiple expansion are you looking for? By the way, discounted. What time of an exit period are you looking for? Then again, discounted. And then come up with a very long-term strategy, right? Which will require investment along the way. We get it. Stay humble. But when we talk about reverse engineering the exit, that leads us back to, you guessed it, the buyer. Here's Marizzo Musi, a partner at Baying Capital and the head of the portfolio group for PE in Europe. We reverse engineer the exit before we sign. We aim to build great companies at Baying Capital, assets which are highly desirable in the market. And the company building journey starts with a bold ambition, which we define jointly with management. In crafting it, we ask ourselves, what will a buyer pay a premium for in four-file years, and what will they discount? And buyers essentially pay off for two things. Sustainable growth, they can see continuing under their ownership, and a clean, well-managed assets that can underwrite quickly. And we deliberately build both. But Alexis Underwood, a partner at the mid-market industrial firm Windchurch, raises an even more pressing question. I think one of the most important questions at acquisition is, who is the likely next buyer? And what are they going to care about? Because different buyers certainly value different things. Strategic buyer may care more about integration readiness, cross-sell opportunities, customer overlap, while say another sponsor may care more about scalability or reporting infrastructure, or whether the business could support future M&A. So I feel like the best way to approach it is to really start building those proof points early. I think a mistake is to treat that exit narrative like something you can build in the last six months. But I think the best exits don't happen because management suddenly creates a compelling story late in the process. I think they happen because the business has been building evidence for years, showing up in things like KPI consistency, pricing governance, forecasting discipline, customer retention tracking, my world sales pipeline visibility. Ricardo Baciel leads the value creation team at Premiere and he's even more blunt about it. The value creation plan needs to really reflect on what you're trying to target when you exit this business. We are a growth investor, our preferred companies, we're investing good companies to make them great or great companies to make them even better. And we want to really build quality. What we're finding is that, especially in the current environment, but it's being already the case for a few years, quality wins. Great quality, find the buyer, whether it's strategic, over the last 12 months, 60% of our exits, and we exit lots of business, we've done about 10 billion of euros of exits over the last 12 months, 60% of those have been to strategics and strategics do buy quality. And strategics can also help a sponsor develop that investment case during the initial bidding process. Here's Brian Cassidy, the president of Crestview. If a strategic is not in the process, we ask ourselves why? Why isn't a trade buyer interested in this business? Is it too small? Does it not have the right types of products and services? Is AI a threat? We go through that entire process with our IC. Our ideal exit is to a strategic buyer. And for highly strategic assets, strategics or trade buyers are not constrained by valuation multiples. And even if they do look at valuation multiples, they're often come with synergies and they can just afford to pay more. And Brian's got a recent win to backup his perspective. So one of our most recent investments and most recent exits was a company called ELO Touch Solutions. The company provides touch screens for retail and restaurants, but for ordering and payment. We transformed the company after we bought it. It was primarily a hardware business. We transformed it to like an integrated solutions provider. We added customers like Target and Young Brands. And we just made it more scale with recurring revenue that would attract more of a strategic buyer. In last October, we sold the business to Zebra Technologies for 1.3 billion. And they could pay significantly more than any sponsor buyer. Strategics are by far the favorite exit. And with good reason, given the nature of pulling off an IPO today, according to Ricardo from Primera, you really need the perfect company to IPO successfully. As for why, here's Helen Lee-Breg, an operating partner at Ardian and a member of the firm's management committee for buyouts. In the gestation of our period of investment, would we have to go to the IPO market or not? Because for a private equity fund, depending on the size of the company, that's something that we have less control over, especially when it comes to liquidity and DPI. Because if your forced exit strategy is an IPO, then by definition, you are dependent on public markets and when the market is open. But also the timing of when you can get that liquidity is obviously phased. And again, it probably is wishful thinking. Everybody thinks that in two years, you can actually generate enough liquidity that with an IPO, you can get out fully. We all know that in reality, it's not that short term and it's not just linked to how you negotiate your lockup periods. So strategics it is. And potential strategic buyers can show up early, so early that they arrive as bidders. Here's Neil Cavillage, a senior managing director at Center Bridge. One example that we have is a manufacturing company is about a billion dollars in revenue. It serves the utility space. And when we bought the company, we won against a whole set of strategics. And so the first thing we asked ourselves was really two things. One is why? What is it that allowed us to outbid them, which is actually kind of rare? And to who were they, and would they show up again at the end of the next process? And as we thought through that, we developed specific relationships with those strategics. We kept the communication open. We had them do plant visits. They got to know the management team. We started to think about things like if we were doing an add-on acquisition, does that make it more or less attractive to the potential buyers who we had in mind? And so building it from that very beginning phase, but then allowing that to creep into our strategic decisions and understand the shape of the company that we were trying to build made a big difference in our ability to then go back to market and talk to the same buyers. And some firms don't wait for them to show up at auction. Here's Mateo Stefano, the managing partner and co-founder at APIS partners, a UK-based firm focused on financial services and infrastructure. Thanks to the fact that we only focus on one sector, we kind of understand who the buyers are going to be for a specific asset long before we even start engaging with the specific potential investment. And in fact, one of the crucial elements of our diligence when we are diligence in an asset, a potential investment, is actually to go and speak to who we think could be the potential future buyers for five, six years down the line. And ask them, "Hey, what do you think about this asset? What do you think about how these guys are actually approaching technology or having a specific go-to market or the quality of their management team?" teams and the quality of their offering. For Mateo, this achieves two core aims. You're achieving an element of diligence because people within a specific subsector know best who are the good companies and the bad companies. You are pre-warning future buyers that this is going to be coming your way in four to five years. So if you're going to build a strategy around Western Europe or Africa or Asia in this specific subvertical, I know that that's going to be an asset coming to me or coming to market. You're also getting feedback that you can then provide to the potential industry company on how they can improve their own operations and make themselves more attractive for a future exit. And naturally, just as such, strategics can provide intel into their competitors or potential acquisitions, they can also help sponsors land deals by vouching for their skills and integrity. Here's Helen again. And already in buyout, we are very much focused on primary deals that link to families and founders. And it's not a very big surprise to you that families and founders in the same sector, they kind of run in same circles. They know each other extremely well. They provide references to each other about if you decide to consider a sponsor deal working with the private equity firm, you know, financial institution with whom do you have experience and how is that experience, you know, relative to how you have to manage your cousins in terms of a family business, for example. And so, you know, just to give you a specific example, one of our recent investments that we did in 2024, the family business was the dogenleys family. It's in the food value chain. It's a company called Robocoup, they specialize in basically food kitchen equipment, professional services, kitchen equipment. But that relationship came about because we as a firm have historically invested a lot in the food value chain, especially in the French market. And you know, the dogenleys family did reference checks with other families, naturally. And then that also creates a momentum in terms of opportunities and in our particular case, it is true that we think that there's a lot of value creation. You can think about when it comes to primary deals as well. Such relationships are key, but here's where we remind all of you that in today's market, all assumptions, even those made by friends of the firm, need to be pressure tested because the margin for error is only shrinking. Here's Alexis from Woodwood again. I think a few years ago businesses could potentially sell a compelling growth story, a strong market, or the idea that there was lots of future opportunities still ahead and cheap debt and a more forgiving market environment covered a lot of operational gaps. But today, I think buyers are a lot more skeptical and are more operationally sophisticated. So when financing is tighter, your diligence needs to go deeper and your growth assumptions just have a much bigger degree of pressure testing. And I think buyers want that evidence that the operating model underneath the business is real, scalable, and repeatable. And here's what that looks like in practice, according to Doran Grossman, a former CEO and an operating partner. I think a critical thing when you are putting together the exit thesis when you're also developing the entry thesis is how are you going to de-risk the business for the perspective buyer, depending on the buyer's segment? And what are the upside opportunities that's going to cause that buyer to pay the multiple that you're thinking of? So for example, you know, in a business service company where I was the CEO, we had started to do a number of acquisitions. We built a pipeline to do more acquisitions. By the time we got to the exit, there was a process and a pipeline of deals to be done. And there was also a demonstration that deals could be done by this business and they could be integrated. So that presented upside opportunity. On the downside risk perspective, you know, a stronger management team than what you came into the business with is always very helpful. Very often in the lower middle market or the middle market, the strength of the team is not quite there upon entry. And the investment thesis is to get the team upgraded, have performance management systems in place in the appropriate bonus systems, etc. And if you can demonstrate that value to the perspective buyer that you've de-risked the management team, that tends to help quite a lot on the exit multiple. I know leadership issues quickly devolve into platitudes, but the quality of leaders in the culture can provide a layer of insurance. Here's Adrian Letz, managing partner and head of business operations at Brookfield's private equity group. Fundamentally every business that we buy and that we look out, we're thinking about the organizational structure and the leadership. And most importantly, the cultural transformation that we're trying to drive and the ambition within the business, how that then translates into developing a value creation plan is an important factor, but what you're really trying to deliver is margin resilience. You're really trying to deliver systems in infrastructure. You're really trying to deliver on things like price and price understanding, go to market, go to market optimization, how you're really crystallizing value in that business. Many of the businesses that we look at, both at a top-line level and driving that top-line, but also at an operational level, needs maturing. And the calculus that we're putting forward in thinking through that organizational structure, the people transformation, the cultural transformation, the leadership is about imbueing that capability so that it sustains. Because in these volatile times, potential buyers may prefer modest, reliable gains over pie in the sky promises. Here's Winwood's Alexis Underwood again. I think with all of the ambiguity in the market, it seems like buyers are kind of willing to pay a premium for confidence within the company because there's very little confidence that you can say something definite is going to be happening in that market. I feel like the companies that are performing best in processes today aren't kind of the flashiest, sexiest businesses. They're kind of the businesses that are easiest to underwrite, and that tends to be businesses that come with the clarity where you can see how the company operates. You can see what's driving growth, you can understand where the margins are coming from. The upside is clear, and you can really feel good about performance likely to continue. So it feels like clarity is a stronger driver than ever. And for an example, here's Jerome Lawson, a partner and head of portfolio operations at Ambienta, on his firm's recent exit from Namriel, which provides software that allows business transaction documents to be digitized. During the whole period, Ambienta implemented by an build strategy that's all the firm makes seven out on acquisitions, and it tracked through the course of this growth, the metrics that matter to Ambienta's investment strategy, and frankly that matter to our LPs and the people that we do business with, and so things like the tons of CO2s that were oil equivalent energies that were reduced, CO2s that were saved, all of those metrics were tracked, and the construction of the portfolio of services, which was enabled by these add-ons over time, was core to the valuation that was achieved, which was one of the largest returns for the firm. Jerome's firm is devoted to such sustainability plays. But I'd argue that it's still an example of de-risking an investment, and proving its business model is real, scalable, and repeatable in the eyes of the buyer. And we'd be remiss if we didn't reflect on the full range of things keeping buyers up at night. Here's Chris Satchel, head of portfolio tech at CD&R. We've had a high-churn, high variability environment for a good while now. You think COVID followed by interest rates, followed by geopolitical uncertainty, followed by domestic political uncertainty. That makes it harder for people to predict, especially if you have a cyclical business, or what will the next end years look like? And so you're going to have to overcome buyer trepidation in that environment, so that may put even more pressure on just how good is your operational story, how strong is your market, were you in the right segments. And then on top of all of that, you now layer in AI uncertainty. And even if you're not in say a SaaS business, people are still going to be pressuring you around, how will AI affect your industry? Will it affect you competitively? What will it mean for your internal operations? Yes, AI has to be part of this bulletproof value creation plan. But since buyer's prize reliability and resiliency right now, sponsors should stay humble with their infrastructure and IT revolutions. For example, if you've just done a tape-private and you've got great financial systems, you've got great compliance and audit, you've got great controls, don't undo all of that just to save some operating expense, because you, at some point, are likely to have to build it again, especially if you've gone grow the company significantly. So retain what is good. The other one is, I think there's no regret moves, like having a strong operational base inside the company. So I'm not going to see anybody ever regret having a strong data layer within their company, with well-governed high quality data that represents their business and allow us them to build operational capabilities on top, which now could be AI-based capabilities. So what you don't want to do is spend a lot of time effort and money delaying other efforts, so you can integrate the company only to find out you should have kept it in two pieces, or it came in four pieces and you wanted to sell it in two, and you integrated it into one. And now you're trying to split up your ERP and CRS. them environments again, you're trying to separate your data platform again. And if the risk in an investment case matters, cybersecurity is front and center of that effort. Here's Megakalzi, a partner with the cyber team at Alex Partners. Cyber security is one of the fastest growing areas of that scrutiny that you are actually seeing. And the buyer's diligence team will come in and ask, you know, what is the security architecture, that incidents have occurred, how are they handled, what liabilities remain, and GPs who can answer those questions really cleanly because they invested in cybersecurity infrastructure during the hold-in period or reduce friction, it'll reduce friction at close and often protect the multiple. And GPs who can't answer those really invite potential escrow provisions or so on. And really the practical, I would say, implication here is cyber readiness is a part of, you know, what taking the buyer's point of view really means. And most GPs treat it as a last minute item rather than a multi-year preparation. And that's a big mistake, right. When you work with PE firms to build the security story alongside the operational story, so it holds up when the buyer's technical teams come in and have that conversation. In short, that cyber security plan needs to be integrated into the investment case before the deal closes. Like so much around deal making today, it's never too early to do X or Y, but it's frequently too late. Let's let Sarah be saying, from Alex Partners, bring us home. You really have to start at the start. Have your plan ready, discount that plan and then work backwards. So why would say is having your long term plan ready? Because that helps you with coming up with some changes along the way. And even as you're thinking about the exit and your narrative, then everything becomes a story that you can tip. I think that's very important, right. Everyone is coming to the realism that like again, the multiple expansion that happened four or five years ago is not happening any longer, right. The buyers are demanding a lot more. They need a tighter validation of the synergy and the realism of the synergy. So the sooner you start, the sooner you have the management brought into the process with you and the tighter story you can have, the better it is we. And for your LPs, I read that I'm aware of how much this feels like common sense. But remember, as those checklists get longer and longer, it's easy to lose sight of the core priorities, knowing what kind of buyer you're pursuing for an exit, making sure you understand what they want, what they fear and what they hope to build in the future, appreciating that a great management team can be its own insurance policy. An IT investment should focus on reliability and security, not cutting edge solutions or some boilerplate approach to infrastructure. In our next episode, we'll be exploring how to best time your exit when the only thing we can rely on is that there will be another surprise, whether we like it or not. Thanks for listening. To make sure you get all the episodes from the season of Disruption Matters, subscribe to Private Equity Spotlight wherever you get podcasts or at PrivateEquityInternational.com. This episode was produced by Natalie Nova Kova and edited by Eric Fish. Our music is against the clock by Rhythm Scott. I'm Rob Kitecki with P.I. Group, see you next time.