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How to pitch a rollup to Private Equity (PE) - what metrics will they look for?

Private Equity Investment MetricsMy company has an established software business and a few competitors in our space in the U.S.. We would like to buy our biggest competitor if we can get funding to do so. We have, via existing board and investors, connections to PE firms, and, as usual, I have been asked to build the pitch and financials for pitching the PE folks. However, I have never done a PE pitch, nor a roll-up pitch. I've done literally hundreds of VC pitches, but from afar it seems like most PE firms have very different goals than VCs. Such as PEs seem to frequently pull a lot of money out of their investments in the form of dividends - VCs typically don't do that. So, I would love to know what the PE investors would expect in terms of a dividend or other payment: e.g. should I just build one into the cash model of the rolled up businesses? If so, what rate would they expect? Also, what about payback? Are they investing as equity or more as debt? I'm expecting they do both/either depending on the kind of PE firm, but what is the baseline assumption when dealing with PE firms? Aside from the core model of P&L, balance sheet and C/F, what metrics will they likely be looking for aside from typical profitability? Thanks to all that comment!

Answers

Topic Expert
Joseph Ori
Title: CEO
Company: Paramount Capital Corporation
(CEO, Paramount Capital Corporation) |

The pitch deck should include the following:

1. Strategy for the acquisitions and scaling the biz
2. 5-7 yr pro forma ni and ebitda
3. PE firms do primarily equity, so 5-7 year exit strategy
4. Include dividend recap as one of exit strategies
5. Show irr and npv return metrics based on free cash flow & terminal value at wacc
6. Sources of debt/equity for future acquisitions
7. Exit strategies of sale, ipo, refinance and dividend recap
8. PE investors looking for 20-25% irr on equity in 5-7 yr hold

Topic Expert
Dana Price
Title: Vice President, M&A
Company: McGraw Hill Education
(Vice President, M&A, McGraw Hill Education) |

Who is your team and what has your team accomplished individually and together? Do any of the key execs have skeletons in the closet you don't want coming out (background check, etc.) Show your acquisition strategy in multiple format as well, not only DCF. If you have foreign ops, explain your FX/hedging strategy including operational hedging. Risks to the business, lay it all out. Most of all, don't lie and don't get cute with any presentation of numbers or metrics.

John Argo
Title: Consultant
Company: Independent Advisory Services
(Consultant, Independent Advisory Services) |

I would focus more illustrating and supporting WHY everyone makes money than the HOW's of the deal structure with any class of investors.

The PE pitch needs to hit the same high points as a VC pitch will hit: team, market, competitive advantages, etc., all the stuff that helps size risk and opportunities.

You should pencil out a variety of exit strategies that are roughly neutral to the preference of the company, that easily hit the 20% to 25% IRR (with upside potential...) but not necessarily present them until you're discussing a specific deal with a specific firm. These will simply be your guardrails for deal discussions.

Focus on the financial results and competitive advantages from the rollup so investors will be able to overlay their own expectations and investment/exit strategies without assuming one model or another. I think Joseph is about right on the 20% 25% IRR but the investor will need to see potential for more or very little risk.

In a roll-up, I would focus on the team and the opportunities across the combined customer lists or whatever the impetus behind why your company is considering it. A rollup only makes sense if it pencils out for shareholders on both sides combined with the new investors...and that it makes more sense than going it alone by a wide margin.

Why it makes sense financially-strategically-risk-team ought to be the focus of the story, rather than the attractiveness of the deal terms. A solid story there will then inform the deal structure.

Once you pencil out why the roll-up makes sense and, secondarily, the general terms that the company would find attractive, it's the same drill as VC pitches. Screen firms that have experience in your space and in the expected deal size, who's funds are at the right maturity for your expected exit horizon. Some money is more patient than others. Family offices (SFOs, MFO's) may look at things differently than others. Find one with the talent that will help crystallize the opportunity the rolled up companies present. All other things being equal, it's highest risk-adjusted rate of return.

Even if you have board connections to PE, it's probably worth talking to a handful of placement agents knowledgeable of your space to hear their pitch and recommendations. I'm sure you recall from your VC pitches that fundraising is a full-contact sport.

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