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M&A: When private equity calls

by EN

Piers Bearne, founder of Collingwood Advisory, the scaleup, value creation and corporate finance platform for the events and media industry and Collingwood Advisory’s senior adviser for corporate finance Dominic Bolton look at the M&A landscape and say timing, alignment and rollover are crucial. 

Private equity (PE) has been a market-shaping force in the exhibition industry. With a typical investment cycle of three to five years, PE-backed platforms bring discipline to the art of growing shows and consolidating them into market-leading portfolios.

One reason business owners choose to sell to PE-backed buyers is that those platforms are led by fellow entrepreneurs who speak their language, are interested in their products and get excited about their growth story. It’s important to remember that behind those management teams are financial investors who have very specific criteria and a defined operating model.
PE investors themselves have shown renewed commitment to exhibitions, particularly trade shows, during and since the pandemic. Exhibition businesses tend to have attractive cashflow profiles and (largely based on onsite rebook) quality of earnings, and that offsets any increased risk from a pandemic.

Another positive sign is the growth of newer PE-backed platforms such as Arc Network, Nineteen Group and RoarB2B – and we expect to see increased dealflow from these new entrants as well as renewed activity by the majors – Clarion, CloserStill, Tarsus and others.

Collingwood recently advised Netherlands-based vegan protein platform Bridge2Food on their recent investment partnership with Simon Foster’s consortium Arc.

There was real concern during Covid-19 that valuation multiples would drop materially for exhibition-led businesses. We have seen headline valuations hold up well, although early data suggests that smaller events assets are not reaching the highest multiples seen pre-2020; and the most attractive businesses to buyers tend to include “exhibitions plus something” – 1-2-1 meetings, digital content, memberships and/or conferences.

Buyers are also looking for structures that allow them to offer de-risked premium valuations. We are now seeing a new ‘rollover’ structure, largely being offered by US private equity-backed platforms, which adds a risk/reward element to the deal.

Rolling thunder? PE exit timing post Covid
The majority of PE platform businesses exit to other PE investors: typically, most of the management team will stay on and build with new backing. At any one point, different platforms would be at different stages of their investment cycles.

Coming out of the pandemic, those investment cycles are more aligned. Investors were unable to deploy significant capital for two years, and need to do so in order to generate the required returns. The PE financing model depends on embedding and then generating a return from new acquisitions, so M&A activity by PE-backed event platforms tends to slow down in the last 18 months prior to exit. In that final period it is mainly about bolt-ons to existing portfolios.

We expect a continued surge of PE-backed acquisitions during 2022 and early 2023; but with most of the active platforms expected to exit between Q4 2023 and Q4 2025, a slowdown in activity going into H2 2023 at the latest.
Should business owners bring forward exit plans in order not to miss out? Not necessarily. If your business isn’t making sufficient ebitda (profit), then it doesn’t matter how many buyers are in the market, your valuation is likely to fall short of your ambitions; and if your company isn’t sale ready from a performance, reporting and financial management point of view, you risk starting a failed process or ending up with a price chip.

However, if you are targeting one or two PE-backed buyers in particular because of sector, geographical or business model fit, it’s worth finding out what their exit timelines are as that may well affect your exit timing.

Understanding rollover
Coming out of the pandemic, we’ve seen a ‘rollover’ structure proposed to sellers on multiple occasions, mainly coming from US investors. This is like a shadow version of the kind of deal that a management team gets when PE invests directly in their platform.

In this structure, a buyer acquires a majority share in the business (whether in one transaction, or using an earnout structure over multiple years). The entrepreneur retains a minority share in their company, which then operates as a subsidiary of the PE platform. That minority share is then acquired on the day of the buyer’s next exit at a valuation multiple (of ebitda/profit) related to the platform’s multiple, in other words offering the seller an opportunity to get a significantly higher value for that last tranche.

The benefits for the buyer are clear: They mitigate the risk of entrepreneurs leaving the business prior to their next exit, and have continual alignment on profit growth up until that point.
For sellers, the picture is more nuanced. You have to do the maths -there are different ways to value both the buyer’s and your own company’s value on the date of rollover. You also have to be clear about your willingness to lose control of exit timing; so make sure you are well advised.

Alignment
Selling your business into a private equity-backed environment can be very energising. The three to five year cycle focuses minds, offers an opportunity for entrepreneurs to align closely with buyers, and very often creates new career paths for talented management teams.
Ensuring that you are truly aligned on a personal and strategic level is key. CEOs of trade buyers are intelligent, charismatic and persuasive people who will sell you a compelling vision. If you’re thinking about selling to a PE platform, it’s wise to get to know their model, the synergies and their investment horizons.

 

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