Carve out, fix up, sell off

In a tough business environment, with inflation raging, and a recession around the corner, corporates are under pressure to reprioritize. And there is no shortage of candidates for disposal. As of December 2022, KPMG analysis of more than 1,400 listed companies in North America with annual revenue over $1 billion revealed that more than one third had underperforming divisions. KPMG analysis shows a similar story unfolding in the IM sector, where 32 percent of 347 companies had segments that underperformed. And this is just for reported segments. Looking beyond this sample, there are likely many more underperforming IM assets that are candidates for disposal.

The trouble is, finding strategic buyers for non-core assets is tricky when parts of a business are less attractive. Many public companies do not want to take on a mixed bag of good and challenging assets. Enter private equity, which loves the jobs others hate—PEs thrive on buying and separating legacy assets, cleaning them up, and adding value before selling those assets in a three- to five-year timeframe.

Take Francisco Partners, which purchased healthtech business Qualcomm Life from parent Qualcomm in 2019. Francisco had viewed Qualcomm Life’s progress over several years and had a real feel for its strengths. During the pandemic, the PE brought in extra capability (via another strategic acquisition) and pivoted the company toward monitoring of hospital patients. The resulting business was rebranded as Capsule Technologies and sold to Royal Philips in April 2022 for $635 million—a gross IRR of 233 percent and a MOIC of 11x.¹

In another instance, energy equipment manufacturer Howden was acquired by KPS Capital Partners from Colfax Corporation in an extremely complicated global corporate carve-out deal in 2019. Working with Howden’s capable management team, KPS set about to transform the company into an autonomous, innovative, world-class air and gas handling platform, tilting the business toward sustainable solutions like carbon capture, wastewater treatment, and energy recovery. As a result, Howden achieved record orders, revenue, and profitability before being sold to Chart Industries for $4.4 billion in November 2022.²

Both of these cases demonstrate how PEs see value where others do not, and are prepared to invest in the businesses they carve out, acquiring additional strategic capabilities and focusing on growth through dynamic leadership.

Footnotes

1. Deal of the Year: Francisco Partners carves out Capsule with surgical precision,” Francisco Partners website, April 1, 2022
2. ”KPS Capital Partners to Sell Howden to Chart Industries,” KPS Capital Partners website, November 9 , 2022