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The co-investment process: a case study

Jeremy Knox, Senior Investment Director Private Equity, explains the distinct steps in the process of private equity co-investments, which are crucial to successful execution.

27/11/2023

Authors

Jeremy Knox
Senior Investment Director, Private Equity

Every deal in private equity is unique because no two businesses are the same.

However, there are distinct steps in the process of private equity co-investments, each crucial to successful execution.

First up is sourcing, where investors and private equity sponsors collaborate to identify promising investment opportunities.

Private equity sponsors are the front line in the sourcing process as they see deals from multiple sources within their own industry networks as well as traditional channels like investment bankers.

Often they will even see deals before they come into market. Co-investors contribute to this process by drawing from their own networks, market insights, track records, and other GP relationships that they have.

Once a compelling opportunity is identified, the due diligence phase begins. Here, we move into a comprehensive assessment of the target company, looking at its financials, operational health, competitive positioning, and future growth prospects.

Co-investors, in collaboration with the private equity sponsor, scrutinise the investment and look for alignment with their own investment criteria and risk tolerance.

Thorough due diligence is essential in mitigating potential pitfalls, catching any risks or red flags, and enhancing the probability of a successful co-investment outcome.

Finally, with comprehensive due diligence completed and investment approval secured, the co-investment process transitions to the execution phase, where the co-investors fund the investment and then work closely with the lead private equity sponsor to monitor the investment.

To give you a flavour of how co-investments can work in action, a great example is a company called Coastal Construction.

Coastal Construction is a value-added distributor of waterproofing products, serving the Southeast United States market.

Coastal was a family-owned and operated business for many years with a strong market position and successful track record of growth.

We co-invested in Coastal alongside a highly specialised private equity fund that is focused exclusively on distribution and logistics companies and brought to bear a tremendous understanding of the industry and a very clear plan to create value and transform the business.

In four years, the company was transformed and grew its EBITDA by close to three times.

This impressive growth was driven by strong demographics in the target regions of the Southeast US, an area that is receiving a tremendous amount of investment and an influx of people migrating to these states.

New residential and commercial construction followed this movement of people, and that tailwind meant that Coastal could pay down a material amount of debt while continuing to grow.

The company was led by a strong management team which was enhanced during our ownership.

The company also completed a number of strategic initiatives, including branch openings in new markets and strategic M&A.

Because of the growth of the platform, the company became a very valuable acquisition target for both strategic and financial buyers.

Ultimately, Coastal was acquired by a larger strategic in the sector, leading to an outsized return on our co-investment and a great example of business transformation.

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Authors

Jeremy Knox
Senior Investment Director, Private Equity

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