Private Equity Headwinds: How to Deliver an Exit Against Prevailing Market Conditions

Delivering a successful exit for a private equity-backed business can often represent the zenith of a professional career. After years of meticulous planning, strategy, implementation and hard work, your sole focus boils down to selling the business from one investor to another for a handsome return and in a manner that is a win for all relevant stakeholders. Completing that in a ‘normal’ market is tough; getting it done in today’s market – with high interest rates, buyer-seller disequilibrium, and general economic uncertainty – represents a profoundly different challenge.

Greg Watson is the former CEO of GL Education, a leading provider of assessments used by schools to enable every pupil to achieve their potential by understanding their aptitude, their attitudes, and their achievements over time. Greg joined GL in 2013, shortly after its acquisition by Investcorp and ultimately led it for ten years; three and half years into that he ran a secondary buyout from Investcorp to Levine Leichtman Capital Partners (2016).

Greg launched a sale process for GL in Q1 of 2022 against the backdrop of emerging from a global pandemic, uncertain investors and a European conflict that was rocking financial markets. Despite failing to sell the business to another private equity fund, he engineered a trade sale in early 2023 to Renaissance (a K-12 Educational Software Solutions provider).

At our 2023 PepTalks Conference, he spoke openly about some of the challenges he faced and how to combat an uncertain market and deliver an exit for both your management team and investors. If you’d like to attend the 2024 PepTalks Conference click here

Why did you go to market in early 2022?

First and foremost, our business was in great shape. We had not just recovered from the Covid hit, it had been a net benefit in terms of customer behaviour and market position. Our incumbent investors had held onto the business a little longer than expected due to Covid, having invested in 2016 from a fund that raised in 2014. We saw a window of opportunity – our top-line was growing at home and internationally, US market entry was flying, EDITDA margin was improving, and we had completed a major upgrade to our tech platform– so we believed we were a strong business, even coming into a more mature market.

Things to watch out for when running a process in challenging market conditions.

I had come to the view during the cycle that you must prepare your team extensively for a process and I was right. Bidders wanted more access to management in 2022 than they ever did in 2016 and I would strongly recommend getting at least some members of your team to input into the sell-side CDD and ensure they’re fluent in talking about it.

Ensure you take trade buyers seriously – ahead of the process, where you can identify the best strategic fits, and during the process when you start to have more detailed discussions around the potential sale. Don’t let the whole process get geared to secondary or tertiary PE buyouts as trade will then get discounted and made to feel like they’re not part of the process. In general, the advisors who run these processes design them for PE – fast, agile with tight deadlines – but that is not conducive to a trade sponsor who needs longer to prove the fit and more space to engage their team (and, if they have them, investors).

How do you manage a paused process?

The most important thing to do when managing a paused process is to work out what you’ve learnt. Speak with advisors, bidders, bankers and anyone else who got a look at the business so you can take in a variety of perspectives. When I did this, the consensus amongst this group gave me conviction in my conclusions around what had got in the way of the deal – some in our control, some not – and what we would need to do different next time.
You should also have very transparent conversations with your incumbent investors – you can’t just ignore what has happened. The lack of a successful exit is a shared problem the same way a successful exit is a shared win. We had some frank conversations about what occurred and talked through a few different scenarios to achieve an exit eventually.

Keeping your management team engaged and focused is critical. Bring your people in early to ensure they still feel incentivised and confident that an exit is possible. Communicate that their incentives could still pay out. For GL, there were too many factors outside our control to know when we might pick the process back up again, so to give ourselves a focus, we agreed to set ourselves a shorter horizon of six months to apply what we had learnt from the process and improve aspects of our business plan and our ability to deliver on it. By the time we found ourselves talking to buyers again, we had a better product development roadmap, a new capex plan and a clearer implementation plan for a couple of growth areas.

Be very open with everyone as to why the business has not transacted and focus on instilling belief around the underlying strength of your asset and the team.

How can you secure a trade buyer?

Timing is everything. During our first process in 2022, and then again in late 2022, Renaissance were busy with other major projects so bringing them to the table carefully and at the right moment was critical. I first spoke to Renaissance in 2013, met with three of their CEOs over time and that meant they already had a good understanding of our fit for their overarching strategy. All that was needed was for the right moment to come along for us and them.

As I already said, trade buyers will want extensive access to your team. Don’t show all your cards too early here, especially if you’re not officially on the market – trade buyers will happily eat management time and in many cases, you don’t want to share competitively sensitive information too soon. Open the door but use the next level of access as leverage to move the deal along. Ensure your team are gradually more involved as things develop– it became a lot easier when my team met and liked their Renaissance counterparts and could see the cultural fit as well as the commercial one.

Finally, remember that, behind most trade buyers are their own investors, often PE like your own. That was the case with Renaissance – they had two major PE backers. So, to get a deal over the line, you are – in effect – going to have to do a Trade and a PE deal simultaneously. It’s not so much a win-win as a win-win-win-win, with a win for each of you and your team, your investors, the other management team and their investors.

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