How Private Equity Evaluates Companies
When a private equity group looks to invest in a packaging company, several key factors determine how it evaluates the firm. Greg Elliott, Partner in the Sterling Group, outlined those points in his presentation to FPA’s Fall Executive Conference.
The Sterling Group is a private equity firm whose acquisitions in the flexible packaging field have included Liqui-Box, a company that makes pouches, bag-in-box containers and fillers. Elliott examined five core factors that influence valuation.
1. At the top of his list of core factors is the question: Does the company have market leadership? One concept that ran through his examples involves niche products. Being strong in niches can be a plus when private equity firms value potential acquisitions.
2. Are there defensible barriers to entry by competitors into the company’s market? Elliott cited a non-packaging company that makes filter systems for aviation and industry. Among the barriers to entry are the costly and time-sensitive certifications competitors would have to take before selling jet fuel cartridges into the market. For Liqui-Box, he noted the number of Liqui-Box machines operating in the marketplace creates a natural connection with the Liqui-Box packages and a barrier to entry by competitors.
3. Does a company have recurring revenue? The ability to generate that kind of revenue can depend on a packaging company’s end use markets. How well do those markets hold up through economic cycles? An element in this factor is the stability of a company’s end use markets. In the case of Liqui-Box, Elliott noted its penetration into the quick-serve restaurant market—what Elliott considers a stable sector.
4. Is there an opportunity for improvement? Elliott focused on a company that had been in Sterling’s portfolio. It distributed roofing supplies, and its improvement was to take a series of branches and tie them together into a coordinated network. By doing that, the company was able to thrive in any housing/construction environment.
5. The final area Elliott stresses is the strength of a company’s management team. A track record of success and a passion for operations are two bellwethers that private equity firms use is assessing management’s strength.
For More Info
For a copy the presentation, FPA members can go to www.flexpack.org and click on: “Download Presentations from the FPA Fall Executive Conference.”
Factors that influence a company’s valuation
Private equity expert Greg Elliott says these five factors can influence how a company is valued. He says that analysts will ask: Does the company have:
- Market leadership
- Defensible barriers to entry
- Recurring revenue
- Opportunity for improvement
- A strong management team