Middle market industrial-focused private equity (PE) firms are increasingly turning to the world’s fastest growing economies to boost portfolio company returns at a time of sluggish economic growth in the US.
Growing a portfolio company’s international footprint is key to increasing returns today, according to participants in a recent Capital Roundtable conference entitled Private Equity Investing in Niche Manufacturing & Industrial Services Companies: Strategies for Enabling Profitability in a No-Growth Environment. Opportunistic international expansions into complex markets such as China, India and Brazil can distinguish a company from its competitors, in effect boosting its value to strategic buyers.
Bolt-on acquisitions of production facilities, suppliers, distributors or other assets appear to be the favored approach of PE companies keen to push portfolio firms into new markets. That’s because it’s challenging to facilitate organic growth via greenfield expansion projects in a roughly two to five year timeframe. Also, other forms of international expansion, such as joint ventures, frequently complicate both PE firms’ ability to control the day-to-day operation of portfolio company’s business and the process of exiting an investment.
Expanding via M&A does not come without challenges. Firms may find it difficult to navigate complex accounting, regulatory and compliance rules associated with new markets, according to attendees at the Capital Roundtable event. Also, they have difficulty identifying managerial talent in foreign countries, despite the emergence of new sources of talent in recent years.
Growing a portfolio company’s footprint beyond the US’ borders can be worthwhile, particularly for PE firms with the time facilitate long-term growth. But the expansion process is not without its pitfalls.
On Thursday 10 November, IIICORP and The Capital Roundtable will be hosting a conference entitled “Best Practices for PE Portfolio Companies to do Business Globally”.
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