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5 Ways to Stand Out Amid Shrinking Deals in the Private Equity Market 

3 Min Read

Deals are less available, more costly and lengthier than ever in today’s economy. The private equity market’s uncertainty requires adaptable strategies and innovative thinking to make deals. Private equity firms must shift dealmaking strategies to meet the changing economic conditions, especially with the looming possibility of a recession. There are several considerations firms should make when navigating less M&A deal activity in the private equity market.

#1: Deepening Due Diligence Tactics

Practicing due diligence is consistently part of the dealmaking process—but during high-risk times, spending adequate time vetting deals is even more important. To begin, firms should conduct research to understand whether potential deals align with their overarching strategy. Successful deals will progress profits and the bigger picture.

In this shaky environment, it is often wise for firms to seek deals that promise reliable returns. Firms can determine this by evaluating whether a business shows impressive management, talent and offerings. Investors should also consider whether an investment has the opportunity to generate additional value. This can include crafting a plan that clearly outlines a vision for growth and strategies to reach goals.

Make sure to seek data to make your decision. Rather than solely relying on a seller’s word, investors should see proven results with actual numbers and reports to back up claims. Moreover, forming intimate relationships and partnerships with sellers is a way many firms are positioning themselves as preferred buyers.

#2: Learn How to Structure a Deal that Benefits the Bottom Line

Thriving in the modern-day market requires deal savviness. Getting creative in how you structure the deal can make all the difference to successfully land a profitable opportunity. Plus, buyers recently gained more traction in transactions, putting them in a more favorable position to express performance expectations in the dealmaking process.

Ways to optimize deal structure include contingencies about continued returns and upfront cash. These contingencies provide added protections for investors in an uncertain market. If a business performs poorly, investors can rest assured knowing they have an exit strategy to avoid a disastrous deal.

When curating deal structure, firms should consider that debt is more risky and therefore less favorable in today’s private equity market. It is more important for firms to demonstrate financial stability and solid plans to improve business operations.

#3: Generate a Strong Strategy in Uncertain Times

Developing and adopting a viable core strategy is integral for a private equity firm’s continued growth. Without advancement tactics, it can be unclear which investments to pursue, whether investments fit into a firm’s future plans and how investors can ensure future profitability.

Considerations for your firm’s strategy include:

  • Craft and test a solid investment thesis
  • Streamline and lessen operating costs
  • Proactively analyze portfolio performance
  • Expand in valuable sectors and markets
  • Address short and long-term challenges

With an overarching strategy that expands throughout the investment lifecycle, your firm can quickly and confidently make deals that bolster the bottom line. Firms should adjust strategy should the investment landscape, market conditions or individual goals change with time.

#4: Consider Private Equity Add-on Acquisitions for Additional Value

Firms can further avoid risk by taking advantage of add-on acquisitions. These acquisitions often happen quickly, and because your firm has experience in the sector can be easier to navigate. For firms actively looking for transactions, add-ons save valuable time and resources otherwise spent pursuing outside opportunities.

Private equity add-on acquisitions typically arise from existing connections and knowledge from past deals, making the transaction feel more stable than other opportunities. In an unsteady market, add-ons serve as an easier way to generate value. Firms should nurture connections with sellers and advisors who may prove helpful down the line.

#5: Successfully Compete Against Rival PE Firms

With less lucrative M&A deal activity on the horizon, private equity firms need to hone in on their competitiveness in the market. Sellers are increasingly interested in buyers who show knowledge and expertise in their sector.

To earn trust with sellers, firms should:

  • Conduct in-depth research
  • Connect with relevant advisors
  • Network with key stakeholders
  • Demonstrate proven performance
  • Communicate a strong strategy

The current deal downturn in the private equity market means that private equity firms must entertain new kinds of deals, which requires added vigilance and vetting. Firms should consider up-and-coming industries, related markets and deals with existing connections.

Start Scoring Deals in Today’s Private Equity Market

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