It’s no secret that remarkably high valuations are having an impact on the private markets. An excessively frothy environment such as this increases the risk of overpaying for assets. As investors, we want to actively invest, so restraint doesn’t come naturally. However, with discipline and a little bit of ingenuity, it’s still possible to find worthwhile investment opportunities.
One way to make the most of the current climate is to shift emphasis from platform investments to strategic add-ons. These add-ons can deliver outsize value to their platforms because of complementary products and operational synergies. So far this year, our affiliated portfolio companies have already completed six add-on acquisitions. We’re just excited as our portfolio company CEOs are to see the old axiom “the whole is greater than the sum of its parts” be realized.
Additionally, a corporate carve-out, where a company divests a business unit that is no longer core to its future strategy, can be a good opportunity for investors who understand their complexities. We continue to see carve-out opportunities in this environment, as corporations redirect resources to focus on growing their core business. Of course, these types of transactions can present unique and wideranging complexities. But for investors with the right experience, they can be mutually beneficial for the buyer and seller alike. At Sun Capital Partners, we’ve successfully transitioned more than 50 corporate carve-outs into independent businesses- growing their collective EBITDA by more than 220% from the time of acquisition.
Today’s high valuation market can certainly test an investor’s nerves, but with the right mix of discipline and ingenuity, good companies can still be found at a fair price. When executed well, both add-ons and carve-outs can build value in the portfolio, which is critical during a low-growth economic cycle when investors need to “create their own tailwind.”
Marc J. Leder, based in Boca Raton, Florida, is the co-chief executive officer of Sun Capital Partners, Inc. For more on his work, follow this Twitter page.
