How Private Equity Can Do Creative Carveouts in Tight Markets – Bloomberg

ContinuServe’s Paul Lennick Joins Bloomberg for a sit down on ‘How PE’s Can Do Creative Carveouts In Tight Markets’.


NEWS PROVIDED BY: Bloomberg – Mureji Fatunde

Craving carveouts

We all know that private equity firms like to carve out unloved businesses from public companies. But a company doesn’t have to be public to do a carveout. Private equity firms can also use them as a tool for trimming costs and getting the most out of their portfolio companies, according to two executives I interviewed who focus on the area.

I spoke with Paul Lennick, a former operating director at Apollo who now leads the M&A practice for consulting services and outsourcing firm ContinuServe. I also interviewed Will Bundy, who helped lead the carveout of beauty company Orveon Global from Shiseido on behalf of Advent International and now runs his own firm, Stygian Strategies.

Lennick also founded the M&A Consortium, a group of vendors including ADP,’s AWS and West Monroe that have banded together to offer dealmaking tools to middle-market firms and portfolio companies.—Mureji Fatunde

What’s a carveout you’ve worked on recently?

Lennick: Last year, Advent purchased three cosmetic brands from Shiseido: Laura Mercier, BareMinerals and Buxom. The brands were very intertwined with Shiseido, the Japanese company’s owner. We came into partnership with a few firms and did the carveout for them. The new cosmetic brand company is called Orveon Global based in New York. It’s a cosmetic brand company. 

It’s a very good case study because it was successful and the business is now standalone. It’s in this middle market sense in that it’s a $500 million revenue business and not super big.

Bundy: Paul calls it a creative carveout. Because sometimes you have to solicit companies in order to kind of get the best assets they are trying to dispose of. I supported on the actual carveout and then operational manifestation of Orveon Global.

What happens behind the scenes in these transactions? 

Bundy: There’s two components. First, prior to the actual sign, the divesting company has to divest the assets and get it set up such that you can buy it. So sometimes that takes the form of an IT and operational separation where they actually will give you a full IT suite and often times will operate the company separately for a time. Other times they put in place what are called transition service agreements and then it allows you to buy the asset as is and the seller will provide all the services necessary for a period of time. Orveon was much more the latter than the prior.

What carveouts could we see next?

Lennick: There’s going to be a bunch of announcements after the holidays of carveouts, spins, divestitures, just because businesses are going to go through a downsizing and a restructuring. With interest rates going up to 7%, 8%—it’s affecting companies that have to raise wages and that’s squeezing margins and forcing decisions at the board level on what to do with these tangent businesses that one thought were great. Carveouts are going to be bolstered even more by proactive divestment activity as businesses restructure and try to go through this recession.

Bundy: What you’re going to see is a trend both for private equity firms to divest assets in search of liquidity, kind of monetization of their actual portfolio. But then second, you’re also going to see it on the corporate side. Based on recent discussions with a number of large advisory firms, I know at least 20 major corporations are separating business units and operations. You have the macro trend of a potential recession, but you also have a bunch of companies that now have non-core assets that they haven’t really touched and are underperforming.

These are perfect scenarios for operationally focused private equity firms. You also have a bunch of dry powder with private equity firms and there’s valuation gap in the marketplace. It’s up to about 20%, the valuation gap. So what you’re likely going to see is more private equity firms approaching corporates or other private equity shops saying, “Hey we really want X assets and how do we make this work?” That’s when you really start getting in some very interesting conversations. It helps solve some of the issue that private equity firms are facing where right now there’s a lack of deal flow.

Paul, tell us more about the M&A Consortium, which you started? 

Lennick: The members come into play at different times across that deal spectrum, working traditionally for a private equity buyer that needs support. The consortium does come together to provide an end-to-end set of service providers across this M&A spectrum.

Big firms have all this set up, but the smaller equity firms don’t have these kind of resources and teams and know the right people at AWS, for example. It’s like bringing a playbook to your middle-market private equity firm. Because at the end of the day, carveouts, if they’re done quickly, reduce the amount of transition services cost paid to the seller.


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