The private equity industry is arguably one of the most intriguing around. From the outside, some are mistaken to believe that it’s all based around profit – and any firm that isn’t turning over a healthy figure is never going to be considered for a private equity acquisition.
However, if one delves further into the industry, it’s clear that the above is not true in the slightest. While some companies may only invest in healthy firms, others may rely on their confidence in their ability to turn a company around.
When we talk about this “ability”, it largely surrounds operational differences. In other words, if a private equity firm is able to make enough of a difference from an operational point of view, it can have hugely positive effects for the company’s profit. It potentially means that after a set period of time they can get 10x, sometimes even 100x, their initial investment.
This is where local knowledge comes into the picture. Here, we’ll scrutinize the importance of local knowledge and how a company can use this significantly to their advantage.
The importance of knowing an industry’s operations
If one takes a look at some private equity firms, it’s clear that they stick to one industry. While they may sometimes go outside of this, on the whole their acquisition examples surround certain niches. For example, in the case of Javier García Teruel Avila, it’s clear that this is a man who is highly-regarded in Mexico and is subsequently responsible for a lot of acquisitions there.
Elsewhere, other companies might just stick to certain niches. Some may only buy in the food and drink industry for example – just because they know the market inside-out and can immediately make changes. For example, while they may own a chain of restaurants which are experienced in a certain cuisine, there’s every chance that the same stock control principles could allow them to be financially better-off in a completely different type of eatery.
The benefits of knowing an industry’s finances
Similarly, local knowledge of an industry can allow private equity groups to quickly determine whether or not a particular company is performing under or over expectations.
One could argue that something else which separates the best private equity groups is the ability to valuate a company appropriately. If they have already dabbled in a particular industry, they will know what represents a good price tag. They’ll know the exact ceiling for a company and whether the purchase fee is low enough for them to yield a sufficient return over time.
All of the above means that it’s extremely unusual for a private equity company to invest in unchartered territories. Even if a deal seems good on paper, without that vested knowledge it’s impossible to see whether or not it is going to represent good value for money. Additionally, without the knowledge of the industry, it’s going to take much longer to implement changes which are critical in releasing value from one of these acquisitions.