In the past decade, private equity (PE) firms have come to play an increasingly important role in corporate transactions. Yet how PE firms approach M&A activity remains a mystery to many corporate buyers and sellers. Given this disconnect, getting to “yes” can be particularly challenging when PE is part of the deal.
A recent WTW M&A roundtable brought together executives from PE firms and strategic buyers (aka Strategics) to demystify the process of selling to and buying from PE firms. Here are the top themes discussed during the roundtable:
Some of the key differences discussed were that:
One of the first things our panelists shared and the group agreed on was that the speed of deals is very different at strategics versus private equity firms. Strategic buyers generally have a slower pace in deal-making due to the need for multiple layers of review and approvals, and their focus is on long term strategic fit with their existing operations. This methodical approach extends to their due diligence process, which is slower and aligns with the company’s overall pace and culture of long-term asset holding. At strategics, in many cases, staff focused on business-as-usual tasks may simultaneously be working on the acquisition. In contrast, private equity firms operate on faster timelines, driven by a focus on quick returns and deal profitability. They have dedicated teams and infrastructure designed specifically for acquisitions, enabling them to move quickly through the deal-making process.
Strategics who attended the roundtable said that private equity firms are more aggressive in the deal making process. This is mostly because of the private equity market, where many companies are competing for the same investment opportunity. PE firms often need to act swiftly to secure deals. This urgency can lead to more intense due diligence processes and a demand for detailed information, which we talk in more detail below.
In addition to the fact that the due diligence process is fast-paced at PE, the panelists added that PE firms are also detail-oriented and often need to know exact details to proceed with the deal. Their focus on speed and efficiency reflects their shorter-term investment horizon. This requires sellers to be thoroughly prepared and proactive to address potential questions. More advance preparation helps the seller and means fewer disruptive asks from them as the transaction proceeds. Our panelists recommend that more value can be realized from an in-person diligence meeting as it encourages accountabilities for all parties involved.
When WTW supported a middle market private equity firm in conducting due diligence of an oil and gas company being acquired, the team had to educate the PE client on how important it is to focus on the depth of diligence, not just speed, especially since European locations were involved with complex legislation. Our worldwide reach allowed us to put together a skilled team with experts who had expertise in the relevant workstream in the local countries that the target was in. This helped speed up the diligence process while also achieving efficiencies. The team focused on achieving efficiencies like prioritizing key risks, collaborating with the PE firm’s external advisors, legal counsel and helping the PE firm with negotiations pre-close and plan for greater synergies. As a result of comprehensive (and still speedy) diligence, the PE firm negotiated a Transition Services Agreement (TSA) with the seller to provide a similar HR infrastructure to employees post-close until they have the required infrastructure in place.
Panelists agreed how the counterparties act determines the deal process. Some parties put a good price upfront but fall through/struggle in due diligence. Some are straight shooters about where they lack and where their redlines are. Perception of the counterparty matters in the deal process. Some roundtable members commented that PE firms often have more financial flexibility than strategic buyers, giving them an advantage in their negotiation tactics.
There's also a major difference in culture and style between strategics and private equity firms. When going from a strategic organization to a private equity firm, employees have many immediate concerns not limited to job security, cultural shifts, total rewards packages, etc. There’s been an improvement in how PE firms address these employee concerns, including more transparent communication, creating a culture of performance and rewards, facilitating collaboration and engagement and embracing technology which can help make all of this possible.
When asked about non-negotiables in a PE transaction, the panelists said “Nothing is totally non-negotiable. Aside from ethical considerations, anything goes.” Every deal is different and unique. In some deals, there are terms where you dig your heels in while in other deals, you might easily concede those terms.
The panelists said that everything is on the table during the negotiation process in PE transactions. This means that strategics need to have experts involved who can give good advice. While the lawyers are negotiating the deals, you need to manage your lawyers — they aren’t shareholders of the deal. If employee benefits are a concern and under negotiation, having a benefits expert in the room is better than leaving it to the lawyers to negotiate. The best kind of lawyer is commercial. They should not delay negotiations but focus on getting the deal done, involving the right experts while protecting the client and keeping them informed.
To illustrate, WTW supported a major PE-backed acquisition of a technology company. This strategic move by the PE firm was aimed at combining the firm’s existing technology portfolios with industry expertise and resources to bolster its market position and technological capabilities. Following the acquisition, WTW’s HR M&A team was actively involved in several initiatives to support and retain the employees. We recommended implementing several changes and enhancing benefits packages (improving healthcare and wellness programs and revamping leave policies to include flexible work arrangements) and supporting the PE firm with executing those changes. These actions helped create a supportive work environment that would attract and retain talent.
Private equity-backed transactions often use a TSA for 6–12 months to limit seller dependency, after which they stand up the HR infrastructure for the acquired company. PE-backed transactions have a shorter focus and quicker exit strategies. Strategic buyers may be more risk-averse, especially when acquiring a significant asset. A well-negotiated TSA can help mitigate risks by providing a buffer period to address any unforeseen challenges or issues that may arise during the process. The ability to adapt to changing circumstances and optimize the TSA timeline is crucial to ensure a smooth and efficient M&A process. In a recent private equity carve-out deal supported by WTW, we successfully transitioned insured benefits globally in less than six months, although the initial TSA was negotiated for longer. This was achieved due to specific strategies deployed by WTW. Parallel planning and execution were key. WTW’s global brokerage network was integral in the benefits stand-up and smooth transition. We planned for post-transition operations concurrently with the TSA, ensuring a seamless handover. We also prioritized knowledge transfer to the acquiring company's team to minimize reliance on the seller’s resources.
While strategics and private equity firms approach deals differently, PE firms can demonstrate flexibility in transactions depending on deal objectives, market conditions, negotiations and other situations or requirements. The discussion contributed to debunking the notion that private equity firms are rigid and inflexible, but also acknowledged that the challenges faced in PE transactions are unique.
