Private equity firms don’t always look for profit

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corporate-worldNow Sun Capital have become one of the biggest private equity firms in the world, it’s no surprise to see that a lot of misconceptions are branded about the company’s policies.

One of these is the fact that they will only invest in huge companies, who are already generating significant amounts of profit.

In an ideal world, this might be the case. However, studying all of the company’s recent acquisitions it’s worth noting that profit regularly comes as a secondary consideration.

The start of Sun Capital

At this point, let’s take a look at Sun Capital from a historical standpoint.

The company was started by two friends, Marc J Leder and Rodger Krouse, who had worked together on Wall Street.

The relevance for this is the fact that their first bids for companies were beaten by rivals. They targeted profitable firms to acquire, yet deals were not going over the line.

It caused them to turn to distressed companies; companies that seemingly weren’t attractive for a lot of others at rival private equity firms.

A company can still be attractive if it makes a loss

In 2014, one-third of companies that Sun Capital acquired were losing money. This in itself highlights just how profit most certainly isn’t the premier statistic when weighing up an acquisition deal.

Around half of deals focused on companies that just weren’t performing to their maximum potential. In other words, they still weren’t seen as attractive propositions to a lot in the market.

The potential is within management teams

As the above has highlighted, the majority of companies bought by Sun Capital needed vast improvement.

This is where things get somewhat interesting. Another misconception might be for a private equity firm to pump finance into a company in a bid to increase its market share. While additional finance can be welcome – it’s not necessarily the thing that makes a lot of Sun Capital companies tick.

Instead, management teams are.

The company have revealed that they don’t dictate to their management teams. While top-level operations executives will be provided to newly-bought companies, they don’t initiate wholesale changes in the workforce. These executives will delve straight into the operations side of a business and use their experience to improve all areas, including operations, marketing and just general strategy.

As well as employing executives to carry out such roles, another important process for new Sun Capital companies is a culture study. This is something which can quickly assess just how adaptable and consistent a management team is, and whether they are able to stick to the mission and still be involved as the company progresses.

It’s at this point why it becomes even more clear how profit isn’t necessarily the biggest driver in all Sun Capital deals. The company take a much more granular approach, making a difference in the day-to-day running of operations, and this is how they have been able to initial remarkable turnarounds in businesses – some which have reaped more than 100 times their original investment.

Published by Kidal Delonix (764 Posts)

Kidal Delonix is a contributor to Mr. Hoffman's blog. The views and opinions are entirely his/her own and may not reflect Mr Hoffman's views.

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