While the deal economics of carve-outs can be very attractive, an independent survey, commissioned by TMF Group found that 34 per cent of senior executives from private equity firms with buy-side experience and 27 per cent from corporations said their most recent cross-border carve-out failed to deliver on expectations.
TMF Group is the leading provider of administrative support services for international business expansion.
While a delay resulted in increased cost, a clear majority of those from private equity firms (92 per cent) said it added 10 per cent or more of the original value of the deal, with 30 per cent saying more than 16 per cnt.
The figure for corporates was equally high, with 85 per cent claiming it increased add-on costs by 10 per cent or more, and 38 per cent at 16 per cent or more — all considerable sums given that most of the carve-outs were valued at over $50 million, and some more than $1 billion.
A carve-out is the partial divestiture of a business unit in which a parent company sells minority interest of a child company to outside investors.
The research comes at a time when the market has seen a three-fold increase in the annual volume of spin-offs and carve-outs since 2016.
“We expect a significant reduction in transactions in the immediate term, but there are clearly going to be big opportunities for the cash-rich corporates and private equity firms, with the latter reported to be sitting on a record level of dry powder at the end of last year,” said Paolo Tavolato, Head of APAC, TMF Group.
The unloading of business units and other assets is inevitable as management teams right across the globe look to simplify their business and de-risk their balance sheets as this human tragedy continues to unfold.
“But with uncertainty, comes less financial flexibility and consequently added pressure to get any carve-out opportunity right,” he added.
When it comes to other success factors, the research indicates that the right expertise and resources need to be brought on board as early as possible.
Of those who experienced delays in completion, 78 per cent of corporate and 64 per cent of private equity respondents said they believe they could have avoided the overrun and additional costs if they had been better prepared.
“Untangling a business from its parent company across multiple jurisdictions to create a fully standalone entity can be complex,” added Tavolato.
“In some regions, for example, companies can run six processes in parallel, while in others, each task needs to be completed in sequence”.