Top 5 Reasons Private Equity is So Successful at M&A

As we discussed previously, we are seeing new types of buyer entering the world of M&A .

While strategic corporate buyers and Family Office buyers are competing with Private Equity more frequently than ever before, there’s no doubt that PE firms remain the main game in town.

This week Dan Roth – Managing Director - IBG gives us his view on how Private Equity approaches M&A transactions with a different attitude compared to other buyers—and why PE’s M&A track record is so successful.


Many private equity firms have established a track record proving they have a unique ability to acquire businesses and then operate those companies for 3 to 5 years in a manner that significantly increases the valuation of the business. Why do businesses owned by private equity often outperform peer group competitors and increase the value substantially compared to the original acquisition purchase price?

While there are multiple reasons, and performance varies between private equity firms, most private equity firms share a number of fundamental advantages and characteristics.

  1. Understanding the need for research. Private equity understands that much of the return on investment is based on their ability to acquire businesses in the best way possible from the start and to minimize their risk. They invest heavily in identifying acquisition targets that fit their criteria, perform substantial industry and competitor research before making an offer, and rarely overpay for a business. Part of their targeting includes identifying underperforming businesses that can be improved through better management and proper investment in critical areas.
  1. Exit planning. Private equity invests based upon a shorter time horizon compared to strategic acquirers or existing business owners. The private equity investor expects to exit an acquired company in 3 to 5 years, and rarely more than 7 years. This mentality forces discipline to make sure that each business decision and investment of capital will provide tremendous business results within just a few years. Most companies operate without such a short time horizon.
  1. Use of leverage and cash flow. Private equity typically uses cash and debt to acquire businesses. This use of leverage sets up a much higher internal rate of return (IRR) since this is based only on their invested cash. These firms understand how to leverage the balance sheet of the target acquisition and that the interest paid on the debt once they own the business will become a component of the annual EBITDA for the business. They also concentrate on maximizing cash flow by working within the tax code and by making business decisions such as leasing equipment versus purchasing in terms of how this affects the valuation metrics.
  1. Experienced in the upgrade. As soon as an acquisition is completed, private equity focuses on establishing strong financial controls, internal reporting, eliminates unprofitable units, streamlines operations, and works with management to identify operational inefficiencies. And, private equity knows the importance of having excellent software and IT operations so they move quickly to upgrade to the best available solutions that provide enhanced business analytics to support better decision making.
  1. Portfolio building. Because acquisitions are their expertise, private equity uses acquisitions to add on to their existing portfolio companies whenever possible. Their aggressive nature and understanding of how to eliminate overlapping costs post acquisition allow these private equity firms to grow their portfolio companies much more rapidly. This strategy is also inherent in how they build value by taking advantage of the increased multipliers paid for higher profit companies.

For example, a private equity firm may seek to acquire 5 similar businesses with $2 million of annual cash flow and pay a 4 multiple for each company. When combined, the company, without any improvements, would be at $10 million of cash flow which might command a 6 multiple (or higher). Just by combining the 5 companies, the private equity firm has already increased the value of the company by 50%. When you consider that each of the five companies were acquired using a combination of cash and debt (leverage), you can see how private equity can generate such substantial IRRs when they execute their strategies effectively.

Learn why representations and warranties insurance is important for M&A

Dan is a Managing Director at IBG, located in the Denver office. He leads sell-side and buy-side M&A transactions, capital raising transactions and strategic advisory assignments. His prior experience includes senior roles at McGladery Capital Markets, Apria Healthcare, AccentCare and Arthur Andersen. He holds FINRA Series 63, 79, and 82 securities licenses. Securities transactions conducted through StillPoint Capital, Member FINRA / SIPC, Tampa, FL.

You can get hold of Dan at



Table of Contents