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How US Private Equity Firms Benefit From Buyouts?



Private equity firms when acquire a majority stake in a company by purchasing it, the process is called acquisition, or buyout. If the said stake is purchased by the company’s management, it’s called MBO (management buyout), and in case, there is involved high levels of debts to source the funding for a buyout deal, it’s called a leveraged buyout, or LBO. After buying a firm that is not publicly traded, PE firms restructure them to make them more profitable than ever, and later, after five to seven years sell them at a heightened price to generate profits for themselves and their wealthy investors.

Biggest Buyout Deals Executed by US Private Equity Firms Amid 2018 & 2020

Pitchbook Data

Source: PitchBook Data Inc.

As per a Statista study, Bristol-Myers Squibb acquired Celgene Corporation at a whopping $74 billion which was the largest buyout deal of 2019 in the US. Celgene was a New Jersey-based biopharmaceutical manufacturer. In the same year, finance merger and acquisition deals generated revenues of USD 68.1 billion in the US.

Nitty-Gritties of a Private Equity Buyout Deal

Private Equity Investment professionals don’t necessarily acquire the whole business in every buyout deal. Many times, they buy a large percentage of the company’s assets to get control over the same and hence become the primary stakeholder in the firm bought. But then, it would not be called a buyout. When a PE firm buys a company outright, then only, it’s called a legit buyout deal.

US Private Equity associations such as ‘The National Association of Investment Companies (NAIC)’ encourage the member PE firms to make buyout deals against private firms in the country that are struggling but hold a high scope for growth. Eventually, the private equity firms, after executing on a buyout deal against such firms, succeed in strengthening their portfolio. However, the work is not considered over once a top private equity firm in Austin TX, or in some other downtown location, manages to buy a promising company that has been struggling for a long. In fact, the major chunk of the work for US private equity firms start from there onwards. They now need to plan an effective exit strategy that will make them and their investors a ton of money in profits.

What Happens After a Buyout Deal Gets Finalized?

When the new ownership comes in, a lot of changes in the business model and structure are being carried out. The result of the same brings in a plethora of changes in terms of restructuring of the workforce in the company and modifications in the functioning of business processes.

Below mentioned are the other potential happenings concerned with the fresh buyout of a private company by a PE firm:

Employee Furloughs

When a buyout deal happens in the private equity industry, it’s quite common for the buyer PE firm to sack a few private equity job positions within the company bought, to cut costs of operations. As a result, many private equity careers get hampered mid-way, and the people being laid-off need to restart their job search once again. Following the sacking, PE firms sometimes, do hire select new employees of their liking and need to make the firm grow at a fast pace.

Development of Smart Exit Strategies

As soon as a PE firm in the US, or any other part of the world, acquires a private company, it starts working towards making an apt exit strategy that can be realized a few years down the line to make considerable profits from the financial markets. The motto of the exit strategy tends to be selling of the acquired firm at a much higher price to bring in profits for investors and themselves.

There are three ways of making a profitable exit for PE firms, in general:

  • Make the company go public by issuing initial public offerings (IPO).
  • Selling the business to a competitor firm in the same industry domain.
  • Selling the business to another PE firm, thereby helping conduct a second buyout process.

How Can Private Equity Aspirants Enter the PE Domain?

For graduates in finance or a related subject domain, professional certifications in private equity can be your best bet to break into the said sector as a fresher. They will give you a competitive edge amid the intense competition in the job markets for the coveted private equity entry-level roles. A number of industry-relevant PE certifications are available online to opt for, CPEP(chartered private equity professional) being the most comprehensive for the aspirants.

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