The rise of private equity in the complex carve-out

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The recent business landscape has been shaped by unexpected economic turbulence, prompting businesses to reassess core operations and long-term strategies. The result has been significant growth in complex corporate carve-outs – transactions where a parent company divests itself of an asset or line of business – with the number of UK corporate carve-out deals involving PE funds rising from six in 2019 to 14 last year.

Corporate carve-outs have long been a good way for companies to realise value. However, when the Covid-19 pandemic hit, activity accelerated as businesses re-examined how they allocated capital and began to plan for future growth in a market ripe for strategic acquisitions.

Private equity players have been quick to make the most of the potential deals. Not only are they able to provide capital quickly, but they also have a unique, experienced skillset which can help corporate management execute divestment successfully. “The role of private equity in these corporate carve-outs really is as a solution provider,” says Matthew Nord, Co-Lead Partner of private equity at leading investment management firm Apollo. “As the seller, you really need to find the right corporate partner to lock arms and make sure that this is a success for everyone involved.”

With certainty top of the agenda in an unstable climate, private equity is seen as an attractive partner because it doesn’t face the same regulatory hurdles as corporates in needing to secure relevant merger control clearances. An increasingly robust regulatory framework means that corporates are being more sophisticated in their transactions with regard to risk. “Where they know that there is going to be a regulatory problem, corporates are trying to line up a private equity buyer in advance to effectively acquire those assets,” says Baker McKenzie’s Head of Corporate David Allen. “They can then present a clean solution to the sell side.”

Private equity houses are known for being able to push through deals rapidly which, although effective, does carry an element of risk. To make the process as smooth as possible and avoid the pitfalls that cause a deal to stall, it is more important than ever that corporates are highly prepared. The right due diligence and being clear about financial parameters is essential.

As businesses continue to seek maximum value from assets, the carve-out landscape will develop, prompting more strategic joint ventures and partnerships. While healthcare and tech continue to be hot sectors, there has been a shift towards ESG-friendly assets. It is clear that corporate carve-outs are here to stay, in their many and evolving forms, with private equity facilitating divestment that aligns and strengthens company culture. “We will continue to see complex carve-out activities driving forward,” says Jannan Crozier, Chair of Baker McKenzie’s Global M&A group. “Complexity doesn’t faze people anymore. In fact, if you can embrace it, often you can be the winner in a competitive auction.”