Carve-outs offer private equity investors a chance to acquire
neglected corporate assets.
These can be corporate divisions that are underfunded, trapped in
the wrong structures, or simply lack management focus or
sometimes the right incentives.
And as a result, these former non-core assets often provide
significant value creation opportunities.
We see increasingly strong demand from private equity
players for such deals.
At the same time, these deals are often quite complex, as
private equity firms face certain challenges and
constraints when dealing with carve-outs.
To start with, private equity buyers typically do not already
have the infrastructure in place to integrate the carve-out
asset,
so they basically need to create a new company from scratch and
have to collaborate with a seller to make sure that this
new business will work on day one.
This involves substantial use of transitional service agreements,
so-called TSAs.
Second, private equity investors have high-value creation targets
embodied in their investment case with only five to seven
years max to reach them.
So they basically need to separate and optimize in
parallel.
This means using the transitional service period of
16 to 18 months while the carve-out is still operating as
the old company to stand up the new systems, the infrastructure,
and support the full potential.
Doing a transformation in parallel to separation is tough
and there's still a business that you need to run and grow at
the same time.
But doing this and pushing it into the period of the
transitional services is the number one lever that private
equity buyers can use to create value from carve-out.