What’s the best
exit strategy for
disrupted markets?
Private equity
Global Divestment Study 2017
ey.com/divest
1
A note from private equity leadership
Key findings
69%
Herb Engert
Bill Stoffel
EY Global Private
Equity Leader
EY Private
Equity Leader
Private equity funds are entrepreneurial and agile.
They are prepared to seize upon new ideas and
take advantage of market disruptions in their
quest for growth.
When it comes to divestments, however, this zeal can work
against some firms. Exit strategy often sits with deal teams, who
may be distracted by their focus on investments, instead of an
independent committee dedicated to exit planning. And 70% of
funds fail to prepare on time because they fear damaging the
business. This can result in poorly timed exits or returns that do
not meet expectations.
With geopolitical and macroeconomic tensions on the rise, and
significant potential tax reform expected this year, private equity
(PE) exit strategy will likely become more complicated in the
months ahead. PE funds will need to respond with more rigorous
portfolio reviews, investments in analytics to make better exit
decisions and more time spent on exit planning. They will also
need to make sure portfolio company management is well
prepared for exit and dedicate the right resources to the exit
process to achieve the desired returns.
These are not unrealistic goals for a PE fund. If anything, they
are simply leading practices for an industry that should thrive
on disruption.
of private equity funds do not
consistently dedicate resources
to evaluate exit opportunities.
Page 5
63%
say insufficient or poor-quality
data makes it difficult to make
effective exit decisions.
Page 7
86%
do not have a systematic
exit process and playbook to
maximize value on all exits.
Page 10
47%
say their last exit was too
early or too late, and value
was sacrificed as a result.
Page 10
37%
say their ability to achieve a
higher sales price by offering
flexibility in sales structure
has increased over the last 12
months, given recent tax reform.
Page 11
About this study
The EY Global Divestment Study focuses on how PE funds should approach exit strategy and planning amid massive market disruptions.
The 2017 study results are based on interviews with 100 PE executives between October and December 2016 conducted by FT Remark,
the research and publishing arm of the Financial Times Group.
• Executives are from companies across the Americas,
Asia-Pacific, Europe, the Middle East and Africa.
• Managing-level partners made up 66% of
the executives surveyed.
• Twenty-nine percent of the executives represent firms
with assets under management (AUM) that exceed
US$11b, 22% represent firms with US$5b–US$10b in
AUM, 20% represent firms with US$3b–US$4b in AUM
and 29% represent firms with US$1b–US$2b in AUM.
Market overview
The past three years have been a great time for private equity exits. The sector has capitalized
on various positive factors, including low interest rates, buoyant M&A markets, large corporates’
search for new sources of growth and rising equity prices. Yet the months ahead may prove
more challenging.
Unprecedented geopolitical and macroeconomic uncertainty, as well as rapid-pace technological change, are beginning to
weigh on corporate acquisition strategies, and interest rates —
in the US at least — are trending upward. These factors are
already affecting average holding periods, which dipped in
2014–15 to 5.6 years but crept back up to six years through
2016, according to Preqin. Further, recent and anticipated tax
reform makes it more complex than ever to understand both
tax implications on a fund and the potential buyer upsides.
Despite these pressures, many firms have yet to develop
a systematic approach to exit planning, particularly at the
sub–US$11b AUM level. More than half of PE funds (56%) say
they “sometimes” have an exit preparation plan, while 30%
say they never use one. Further, 57% say their anticipated exit
strategy is implemented only some of the time or not at all.
This lack of consistency often negatively affects sale price.
Given the prospect of a more challenging exit environment, PE
firms will need to plan their exits more rigorously. Ultimately,
successful exit preparation is much the same as good PE
practice for holding and improving a business. It’s a matter of
striking the right balance among:
• Portfolio company management
• Deal teams
• Non-executive directors on the board
• Operating partners
• Independent PE firm investment or exit committees
• External advisers
3
Private equity
Anticipate market disruptions
Disruptive forces are expected to continue disrupting PE
exit plans. Yet 61% of PE executives say understanding
the business impact of new disruptive forces is among their
key portfolio review challenges, and most say it is their
biggest challenge.
Which of the below do you consider a
challenge associated with your portfolio
reviews? (Select all that apply.)
Dedicating specialized resources to the process
69%
In today’s disruption-driven business climate, PE funds need
to respond with greater discipline:
Making the portfolio review process a truly strategic imperative
Don’t speed. Faced with potential political or regulatory
changes, funds often feel pressure to exit quickly, but this
does not necessarily translate into a higher sale price.
Funds should take the time to plan and develop a compelling
and credible value story for when it’s time to sell.
Understanding the new disruptive forces that affect value in our business
66%
61%
Our ability to analyze and interpret data in a meaningful way
55%
Access to external data
46%
Expand the buyer pool. Firms should consistently reevaluate their lists of buyers and consider how to expand
them. While valuation may prove challenging in an
unfavorable market environment regardless of buyer pool,
looking for less traditional buyers in adjacent sectors can
increase the chances of a better sale price.
Access to accurate, comprehensive internal data
44%
Overcoming emotional attachments to assets/conflicts of interest
41%
Better communication between board/strategy team and M&A team
34%
Make technological change an issue for the board. With
the entire value chain being disrupted — from procurement
to production and recruitment — “digital transformation”
should be a focus for the entire C-suite. Leading
organizations are talking less about “digital strategy” and
more about “business strategy in a digital world.”
Consider which market factors could create value. Could
a new business model drive material growth? How can our
portfolio companies address changing customer priorities?
Are there any non-traditional competitors that might
impede competitive advantage?
Percentage of companies that say these external forces will
increase their likelihood of divesting over the next year
76%
Macroeconomic
volatility
4
67%
Risks or opportunities related
to technological change
56%
Geopolitical
uncertainty
Private equity
Dedicate independent resources for exit planning
When PE funds invest in a company, almost half (49%)
agree that market position is the most important aspect of
exit strategy that they consider, followed by potential exit
timing (35%).
As funds struggle to understand how disruptive forces
affect these factors, it’s more important than ever
to dedicate resources to all aspects of PE portfolio
management — conducting regular portfolio reviews,
tracking value creation and preparing businesses for sale.
Most PE executives (69%) say one of their main portfolio
review challenges is dedicating specialized resources to
the process — it is the top challenge across all firm sizes,
regardless of AUM. Management teams in portfolio
companies must have the right resources — from
dedicated personnel to robust analytics — while still being
mindful of costs.
Dedicating resources to sale preparation is another
challenge. Funds often devote the bulk of their attention on
supporting management teams as they seek to grow the
business. Sixty-six percent of PE executives say keeping
the portfolio company’s management team focused on
delivering the plan stops them from actively preparing a
portfolio company for sale, and 55% say the same about
their PE investment professionals.
What are the most important aspects of your
exit strategy that you consider when you
make an acquisition? (Select the top two.)
Market position
49%
Potential exit timing
35%
M&A opportunities
33%
Cost-savings opportunities
33%
Organic growth potential
26%
Management team
24%
What stops you from actively preparing a portfolio
business for sale? (Select all that apply.)
Fear of damage to the business (e.g., employee/customer confidence)
70%
Need to keep management focused on
delivering the plan for the current owners
66%
PE investment professionals need to be focused on
investing rather than preparing a business for sale
62%
say shortcomings in the portfolio review
process have resulted in failure to achieve
intended exit results.
55%
Confidentiality
49%
Fear of losing control over communications
48%
5
Private equity
PE firms can improve resource allocation for portfolio
reviews and exit planning in various ways:
Enable an independent committee to guide exit timing.
Most executives agree that an independent investment or
exit committee — not deal teams — should review portfolio
company development, examine exit prospects and guide exit
timing. While a significant majority (76%) of the biggest players
(with US$11b or more of PE AUM) have an exit committee,
only around half of smaller firms can say the same.
Establish clear value creation and exit roles. Just over
half (55%) of PE executives believe that being clear on
roles in advance of a sale process is essential — though this
percentage is arguably low considering the critical importance
of those who will run the business.
This step appears to be of greater importance to larger
organizations: 66% of US$11b–plus AUM firms identify this as
one of the top two steps in managing a sale, suggesting that
larger firms have a more systematized approach to resourcing
sales processes. This metric falls to just 48% among smaller
firms (US$1b–US$2b AUM).
Take a critical view of personnel strengths and
weaknesses. Well in advance of a potential sale, identify gaps
that need to be filled and where management capabilities can
contribute to the portfolio company’s value. This empowers
a PE firm to either backfill responsibilities or impress upon
management that it will need outside support, so the firm
avoids approaching exit without the right team in place.
Use data to support the story. Forty-three percent of
executives cite a lack of good qualitative or quantitative
data to support the equity story. Identify those who can
articulate the story as well as provide historical perspective
on the company.
Involve operating partners. Encourage operating partners
to challenge thinking around exit timing and potential buyers.
Involve them in putting together a credible equity story for
each possible buyer.
49%
of private equity funds say they have held on
to portfolio companies too long when they
should have sold them.
6
Given that it is hard to predict exit timing and the
future buyer, which of the following statements
do you agree with? (Select all that apply.)
We have a separate exit committee decide exit tactics and timing
59%
We generally hire an M&A adviser well before the expected exit
time to help assess the time to start the auction process
49%
We largely leave the deal team to initiate exit tactics
38%
We generally pick a target exit date and work back 12–18 months
to determine a time to begin active exit preparation
26%
What areas are key to ensuring that management is
effective in a sale process? (Select the top two.)
Making changes to team members well in advance
58%
Being clear on roles well in advance of a sale process — “who will run
the business and who will run the sale process?”
55%
Demonstrating how decisions made by management have been effective
40%
Revisiting all types of incentives early enough so they affect outcome
35%
Getting the right chairman/non-executive directors in place before exit
12%
Private equity
Case study: the role of a CEO in a sale
While the CEO is critical to a successful sale, he/she must focus on running the business for today’s shareholders with a vision
and energy to attract tomorrow’s owners. As an example, one company recently addressed its resource challenges with a dual-track
exit via three key changes:
• A new lead managing director on the deal team brought fresh impetus.
• The incumbent CFO (with knowledge of the past) fulfilled the information needs of the three most likely buyers’ equity cases.
• A new CFO worked with the CEO to refresh and pare down the list of actions to a coherent strategy. These changes were captured
in an internal document to motivate the workforce and an external document to communicate the refreshed business goals.
Result: The strategy document became the focal point that enabled the CEO to channel the business’s resources into a few key areas
demonstrating that the new direction was accretive to value. It enabled the equity story to be presented to bidders in a crisp, clear way
that dispelled the myths of the past. And it also helped keep him out of the sale process until the management presentations.
Use analytics to drive better decisions
Private equity firms often need to develop a better
understanding of divestment success criteria. That means,
where possible, removing human bias from the decisionmaking process.
Analytics can help identify what to sell, when to sell and
how to structure a deal. But most executives acknowledge
they have not yet spent time working through their data
challenges or putting the right set of algorithms in place to
improve insight.
Nearly all (96%) of PE executives say that improved analytical
tools would help them make better and faster exit decisions,
and improve sales preparation (even higher than the 88%
average seen across all sectors).
What “analytics” really means
We define analytics as the transformation of strategic,
financial or operational algorithms combined with complex
data sets into information enabling better, faster and more
decisive actions. This is significantly more complex than
modeling in a spreadsheet. Rather, it includes incorporating
advanced analysis, algorithm development, and a full range
of relevant structured and unstructured data from other
company financial and operational data. It also incorporates a
variety of external sources, including governments, reporting
agencies, weather centers, traffic data centers and social
media sources.
Data challenges
63%
say that insufficient or poor-quality
data makes it difficult for them to
make effective exit decisions
46%
have trouble accessing
external data
44%
say access to accurate, comprehensive
internal data is challenging
43%
say a lack of good qualitative/
quantitative data to support the equity
story for the next owner was one of the
biggest challenges of their last exit
7
Private equity
The benefits of analytics
8
Type
Why it’s important
Descriptive analytics and
visualization (e.g., historical
value-based analysis)
• Describes the base business and its historical performance, taking into account strategic, financial
and operational dimension and levers
• Helps the seller define assets to be included in the deal perimeter
Predictive analytics
(e.g., future outcome and
business impact analysis)
Helps identify:
• Issues early, allowing the seller time to remedy the issues or prepare in advance for a divestment
before it becomes critical
• Opportunities to manage top-line synergies through cross-sell and up-sell, based on a mix of
mutual and new customers
• Cost synergy opportunities
• A forecast for future business performance under a new buyer’s control, thereby helping define
specific areas for synergies and support more rapid synergy realization
Prescriptive analytics
(e.g., operationalization of
predictive scenarios)
Helps:
• Optimize portfolio performance and enable decisions as to whether to fix an impaired or nonstrategic business or sell it, and when
• Assess how to optimize the financial and operational performance of a business given the overall
company strategy
• Define how to leverage the predicted future performance without compromising other priorities
Social media
• Helps identify and describe market sentiment about an asset or a transaction
• Helps identify customer, supplier, employee and other stakeholder sentiment about the company,
brand, products and services
• Provides insights to rapidly recognize synergies
• Identifies trends that are not evident in internal data and which might affect transaction value
Other technologies (e.g.,
robotic process automation,
machine learning, artificial
intelligence)
• Automates data gathering, data processing and information generation processes
• Provides more rapid and on-demand analytics, enabling better and more confident decisions
Private equity
Percentage of companies that
plan to use these analytics
more in the next two years
How effective are your capabilities
related to making portfolio decisions?
Predictive analytics (e.g., future outcome and business impact analysis)
66%
29%
5%
Descriptive analytics and visualization (e.g., historical-based analysis)
51%
31%
14%
4%
Prescriptive analytics (e.g., operationalization of predictive scenarios)
31%
43%
13%
13%
Financial modeling
25%
63%
12%
Other technologies (e.g., robotic process automation, machine learning, artificial intelligence)
15%
47%
13%
Social media analytics
5%
14%
Very effective
13%
Somewhat effective
85%
59%
39%
33%
29%
7%
68%
Not effective
25%
85+15+R
59+41+R
39+61+R
33+67+R
29+71+R
7+93+R
Not using
Case study: descriptive analytics to support
product rationalization decisions ahead of a sale
In preparation for the sale of a digital media portfolio company with 70,000 products, a large global PE owner used descriptive
analytics to understand the price, volume and profitability of each of the company’s products purchased, organized by key customer
segment and distribution channel. Traditionally, as part of the PE fund’s operational decision-making, this analysis had been
performed at the product category level. But in order to better prepare for this divestment, this analysis leveraged transaction-level
data at the individual product level. The goal was to help make product rationalization decisions to improve the overall financial
performance of key product categories ahead of the sale.
Result: The analysis found that 40,000 SKUs accounted for 80% of the revenue. Ahead of the divestiture, 20,000 individual products were
rationalized and ramped down over three months. This resulted in stronger financial performance in the quarter ahead of the sale and
provided the PE management team with a more focused business. Further, the PE fund was able to attract several strategic buyers, quickly
progress through diligence and ultimately close above its targeted price and one month ahead of schedule.
9
Private equity
Spend more time on exit preparation to increase value
More than half (54%) of private equity executives say
they are opportunistic when determining the right time
to sell. Yet many firms feel they are not timing their exits
properly — 47% of executives say timing was the greatest
challenge of their last exit.
Develop an exit playbook to improve sale price. More
than half (57%) of executives use an exit playbook
“sometimes.” Only 14% have an exit preparation plan in
place for all investments, with larger firms more likely to
devise a plan on entry than smaller ones. Only 7% of firms
with US$1b–US$2b AUM always have a plan, versus 17% in
the US$11b–plus AUM bracket.
Evaluate an asset through the eyes of potential buyers.
Most executives (74%) say developing a value-creation
road map, including initiatives that potential buyers could
implement, is one of their most important pre-sale actions.
And 80% present the synergy opportunity for each likely
buyer. However, only half of funds (53%) include sell-side
preparation in their exit playbook.
Spend more time planning. Strategic, critical thinking
about exits requires more than a year of planning (ideally,
around 18 months) to allow time for any fundamental
changes to be implemented and show results. However,
two-thirds of executives say they take an average of just
six months to prepare.
What were the biggest challenges with
your last exit? (Select the top two.)
Timing (too early or too late)
47%
Lack of good qualitative/quantitative data to support equity story
43%
Preparation for diligence
33%
Inadequate support for “upside” opportunities in the projection period
27%
Limited bandwidth/strength of portfolio management team
25%
Small pool of buyers
19%
Advisor support
6%
What does this playbook include? (Select all that apply.)
Tax structuring
74%
Working capital optimization
57%
Management structure review
57%
Sell-side preparation
53%
Commercial review
50%
Case study: time, and timing — allow for enough of the former, achieve the latter
The outcome of a recent exit was directly affected by both time and timing. The plan had been to “buy and build” a series of
operating units into a coherent, synergistic group that would justify a multiple higher than the price of each acquisition. At each
year-end, portfolio management assessed exit readiness against its own checklist. By building it into the annual routine, it was
never a big event.
Result: No one became distracted by the exit preparation — it became part of everyday responsibilities, and its intensity gradually built over
time. An 18-month trigger point was key to the CEO, CFO and the deal team — it was confidential to others.
The timing of the actual exit was achieved quickly. The gradual approach to exit preparation, on the back of a great business and
management team, had delivered a business that was not just ready to sell but easy to buy.
10
Private equity
Consider tax issues up front
There is growing uncertainty around how tax authorities will
react to situations that have historically been market practice.
Even if firms are comfortable with the tax risks in a business
as well as the tax structure for its sale, they need to consider
these risks from a buyer’s point of view.
Conduct tax planning early. Creating tax attributes (e.g., net
operating losses, tax credits, amortizable intangible assets) that
are accepted by tax authorities can be time consuming. And
until they are accepted, buyers may not attribute value to them.
PE firms may not have to execute on plans immediately, as
some tax planning just needs to be correctly sequenced rather
than done months before an exit. But having an outline of a
tax-based plan is a clear signal that the firm is ready to exit.
Two-thirds of firms say they completed tax work ahead of
selling their last portfolio company. Among those that did
not highlight tax upsides to purchasers, most say this is the
single pre-sale value-creation initiative that would have most
benefited exit value.
Factor the value of tax upsides into the price. Being
flexible in sales structures, and highlighting the benefits to
buyers, can improve valuation. Among firms in our survey
that highlighted the tax upsides to buyers, most say it was the
most important step in enhancing sale value, second only to
operational improvements.
• Review historical tax advice and the trail
of why positions were taken
• Illustrate the capacity for tax-deductible
debt, country by country
• Seek to agree on open tax points with
tax authorities where possible
• Highlight any tax incentives that might be available
• Outline tax efficiencies that have been
considered but not yet implemented
Tax considerations
over the last 12 months
37%
58%
say their ability to achieve a higher
sales price by offering flexibility
in sales structure has increased
over the last 12 months
say tax challenges affecting the
ease of executing deals have
increased over the last 12 months
When it comes to tax benefits, where relevant, sellers should:
• Understand the benefits to buyers of different
sale structures
• Provide detailed tax models, showing various potential
financial scenarios, to illustrate when tax losses and
other attributes will offset cash taxes
You’re not always stuck — the partial
tax basis step-up
Most purchasers assume that when buying the stock of a
C corporation, there is no way to achieve a premium on exit
by delivering a tax basis step-up to the next buyer. While
it’s true that a complete tax basis step-up is generally
unavailable, a seller might be able to deliver to the next
buyer a partial tax basis step-up. By “freezing” the value of
the assets stuck in the corporation, most post-acquisition
appreciation can grow outside of the corporation, allowing
the next buyer to obtain a partial tax basis step-up (and
hopefully an increased purchase price to the existing seller).
Equally important, the partial tax basis step-up structure
works well with third-party leverage.
Conclusion
Better planning
produces better exits
Private equity firms need to plan for exits
assiduously, enlist the appropriate resources
for the effort and allow more than the typical
six months to maximize value — especially
related to tax issues. Exit planning demands
independent review by a dedicated resource —
ideally an investment or exit committee
offering a dispassionate view. And, in a
business world increasingly dominated by
analytics, PE firms need to focus on improving
their data sourcing and fixing their data
challenges. This will ultimately equip them to
tell a better equity story to potential buyers.
11
EY | Assurance | Tax | Transactions | Advisory
Read our other
sector-specific reports
ey.com/divest
• Consumer products
• Financial services
• Life sciences
• Technology
Contacts
To learn more and to have a conversation about your
divestment strategy, please contact us:
Paul Hammes
EY Global Divestment Leader
[email protected]
+1 312 879 3741
Herb Engert
EY Global Private Equity Leader
[email protected]
+1 212 773 6202
Bill Stoffel
EY US Private Equity Leader
[email protected]
+1 212 773 3141
Sachin Date
EY Europe, Middle East, India and Africa
Private Equity Leader
[email protected]
+44 20 7951 0435
Satoshi Sekine
EY Japan Private Equity Leader
[email protected]
+81 3 5401 7100
Luke Pais
EY ASEAN Private Equity Leader
[email protected]
+65 6309 8094
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