Private Equity: A Powerful Force in the Transaction Market

Private Equity (PE) has evolved over the past decades into a defining factor in corporate financing and transaction activities. PE firms raise capital from institutional investors and high-net-worth individuals to acquire direct stakes in privately held companies. Their objective is to generate attractive returns for their investors through the active development of these companies.

How Private Equity Works and Its Investment Strategies

The business model of PE firms is based on a cycle of fundraising, investment, value creation, and exit:

Fundraising: Initially, capital is raised from investors such as pension funds, insurance companies, foundations, or family offices for a new PE fund. Investors commit to providing capital up to a defined amount over a specified period (usually 10+ years).
Investment: Using the raised capital, the PE fund acquires majority stakes in selected companies. Target companies are carefully screened and undergo thorough due diligence to assess potential and risks.
Value Creation: After entry, the PE team works closely with the portfolio company’s management to increase its value. This involves leveraging strategic, operational, and financial levers such as optimizing the business model, entering new markets, improving processes and systems, or acquiring complementary companies (buy-and-build strategy).
Exit: After a holding period typically ranging from 3 to 7 years, the portfolio company is sold again, ideally with significant value appreciation. The proceeds are distributed to the fund investors and partially reinvested in new opportunities. Possible exit routes include sales to strategic buyers (trade sales), other financial investors (secondary buyouts), or public offerings (IPOs).

Depending on investment strategy and target companies, various types of Private Equity can be distinguished:

Venture Capital: Investments in young, innovative growth companies, often in the technology sector. Characterized by a high risk-return profile.
Growth Capital: Growth financing for established mid-sized companies with expansion plans. Focus on organic and inorganic growth.
Buyouts: Acquisition of majority stakes in mature, profitable companies. Value enhancement through operational and financial engineering.
Distressed/Special Situations: Acquisition of companies in special situations such as restructuring, turnaround, or insolvency. High complexity and value creation potential.

What all PE strategies have in common is an active, entrepreneurial investment approach with a focus on value enhancement and maximizing returns for fund investors.

Significance and Impact of Private Equity

Private Equity has become a significant force in the corporate landscape. In Germany, over 5,000 companies were owned by PE and venture capital firms in 2021, collectively employing more than 1.4 million people. Globally, PE firms manage assets exceeding $4 trillion USD.

This growing importance can be attributed to several factors:

Attractive Returns: PE funds have historically delivered above-average returns, especially compared to liquid asset classes like stocks or bonds. This has attracted an increasing number of institutional investors.
Growing Mid-Market: Many mid-sized companies face challenges such as internationalization, digitalization, or succession planning. PE provides capital and expertise to address these challenges.
Low-Interest Environment: In a prolonged low-interest-rate environment, investors are urgently seeking yield-generating investment opportunities. Alternative investments like PE offer a solution.
Professionalization and Specialization: The PE industry itself has evolved, with larger fund sizes, specialized investment teams, and a growing ecosystem of advisors and service providers.

The influence of Private Equity extends far beyond the companies directly involved. PE often sets industry-wide trends in strategy, leadership, and governance. The high return expectations and exit pressures accelerate innovation and consolidation processes. Critics sometimes argue that PE’s focus is too short-term and neglects stakeholder interests. Proponents, however, view PE as a driver of efficiency and professionalization and an essential pillar of corporate financing.

Importance for the Transaction Market

PE firms have become a decisive factor in the M&A market, both on the buyer and seller sides:

Buy Side: PE funds are often well-capitalized and decisive buyers of companies or business units. They are attractive to sellers because they typically offer high valuations and can execute complex transactions swiftly.
Sell Side: When PE firms sell their portfolio companies, highly professional M&A processes are often employed. Such companies are attractive to buyers as they are usually operationally and financially optimized and have clear growth potential.
Competition and Pricing: Due to high liquidity in the PE market and investment pressure on funds, demand for attractive acquisition targets is strong. This leads to rising purchase prices and a tightening supply, especially for mid-sized companies.
Secondaries and Co-Investments: Besides direct acquisitions, transactions between PE firms are playing an increasing role. Secondary buyouts involve selling entire portfolios or individual stakes to other funds. Additionally, PE firms are increasingly opening up to co-investors who participate in individual deals.

For company sellers and their M&A advisory teams, it is crucial to understand and leverage the opportunities and specifics of PE-driven transactions. Early involvement of PE investors in the sales process, professional preparation of the investment story, and close support during due diligence and negotiations can be decisive.

At the same time, the specific requirements and restrictions of PE buyers must be considered, such as transaction structure, management participation, or exit planning. A balanced assessment of purchase price, transaction certainty, and seller interests is essential.

In any case, Private Equity is an unavoidable factor in company sales or acquisitions. PE has fundamentally changed the rules of the transaction market and sets new standards for processes, structures, and valuations. Sellers and buyers who adapt to this and actively leverage the opportunities can significantly improve their chances of success in the M&A process.

Private Equity