Understanding Private Equity: Cycle, Mechanisms and Strategies
Private equity refers to investment in the capital of unlisted SMEs and mid-sized companies. In principle, it covers a range of approaches, depending on the size of the target company, the investment horizon and the role the fund intends to play in the capital. The classic private equity fund cycle A fund generally follows three main stages: 1. Raising funds from investors (fundraising) The management team, the General Partner (GP), obtains financialcommitments from investors – Limited Partners (LP): pension funds, insurers, sovereign wealth funds, family offices, funds of funds or wealthy private investors – who commit to invest in the fund. 2. Investment period (generally 5 years) The capital pledged by Limited Partners is progressively called in to finance investments, cover operating costs and remunerate the management team (management fees of around 2%/year).When a fund takes control of a company, the equity is generally supplemented by bank debt (LBO), increasing the fund’s investment capacity and improving returns for investors. Profits from the acquired company are then passed on in the form of dividends to repay this debt. 3. Exit (after 5 years) Investments are resold. Investors recover their initial capital and any capital gains, after deduction of the management team’s remuneration (carried interest: the management team’s remuneration, often 20% of gains in excess of a target return of around 8%). In principle, a fund has a contractual life of 10 years. In other words, when it invests in a company, its exit is already scheduled. Hence the importance of knowing where the fund is in its investment cycle. Some funds, notably those linked to family offices, operate differently via evergreen structures, with no predefined exit horizon. This does not mean, however, that they remain in the capital indefinitely: liquidity mechanisms are generally in place to organize their exit. Major private equity strategies Private equity covers a wide range of investment strategies. Among the most common are Venture capital: injection of capital, with minority stakes, into start-ups with high growth potential, Growth capital: injection of capital, with minority stakes, into SMEs or ETIs to support their expansion, LBO (Leveraged Buy-Out): acquisition of a majority stake in mature companies, leveraged by debt. Other segments also exist (infrastructure, real estate, private debt, secondary funds, special situations), each with its own specific features. Each fund is differentiated by : geography (target country or region), target company size (based on sales and EBITDA) investment ticket, role in capital (minority or majority), degree of involvement (passive or transformational). Even with a majority stake, private equity funds generally seek to retain the management team. They rarely buy 100% of the capital, preferring to leave a share to the CEO (if he or she wishes to remain in charge) and to the management team, via profit-sharing plans. The aim is to align interests and maximize everyone’s gain when the company is resold in the future. All the terms and conditions associated with the entry of a fund – governance, rights and exit mechanisms – are formalized in a shareholders’ agreement, which frames the relationship between the fund and the other shareholders. Levers for value creation The central objective remains the creation of value between entry and exit. Three main levers are almost always used: Sales and EBITDA growth (organic or via targeted acquisitions), Progressive reduction of acquisition debt, Improved valuation multiple (more attractive company in the eyes of the market). In addition to these financial levers, private equity funds also provide : Improved governance (setting up a structured board of directors, regular reporting, monitoring of key indicators), Recourse to experts and consultants (strategy, organization, digitalization, operational efficiency, ESG), Alignment of management teams through management packages, A structured shareholder framework that disciplines decision-making and sets a clear course for growth and value creation. Most LBO and growth capital funds aim to achieve a net return for their investors of close to 15% per annum, i.e. a doubling of capital over the life of the fund. In gross terms, i.e. before management fees and carried interest, this generally corresponds to a target of 20-25%. In venture capital, the targeted returns are much higher, but the risk of total loss is also much greater. Private equity is a powerful tool for financing and transforming SMEs. Behind the simple mechanics(raise – invest – exit), each fund has its own specificities, depending on its positioning and degree of involvement. For company directors, understanding these differences is essential before bringing in an investor. At AKCEAN, we help shareholders define a growth and/or exit scenario in line with the fund’s expectations, and identify the most appropriate partner to support them in their strategy.
Valuation multiples – 2nd quarter 2025
The comparables method is one of the most commonly used approaches for estimating a company’s value, especially for well-established companies. This approach involves estimating the value of a company by comparing it with other similar companies, based primarily on their profitability. Although the best comparison is the multiple at which a similar company has recently sold, publicly listed companies, whose financial data is publicly available, offer an interesting point of reference for establishing valuation multiples for SMEs. The multiples observed on the stock market are generally adjusted downwards to take account of differences in size, increased operational risk and the lower liquidity of SME shares compared with listed companies. Discover the multiples by business sector that we have compiled below as at June 30, 2025.
Valuation multiples – Q1 2025
The comparables method is one of the most commonly used approaches for estimating a company’s value, especially for well-established companies. This approach involves estimating the value of a company by comparing it with other similar companies, based primarily on their profitability. Although the best comparison is the multiple at which a similar company has recently sold, publicly listed companies, whose financial data is publicly available, offer an interesting point of reference for establishing valuation multiples for SMEs. The multiples observed on the stock market are generally adjusted downwards to take account of differences in size, increased operational risk and the lower liquidity of SME shares compared with listed companies. Discover the multiples by business sector that we have compiled below as at March 31, 2025.
Our successes: Fortius management acquires the company (MBO)
AKCEAN supported the management of Fortius in the takeover of the company. AKCEAN acted as financial advisor to the management of Fortius, a Luxembourg company specializing in the storage and logistics of works of art, in connection with its management buyout. The buyers Claude Hermann, CEO, and François Duverger, COO, have played a key role in the development of Fortius for almost a decade. As key players in the company’s growth, they have chosen to take control through a Management Buy Out (MBO), thus affirming their long-term commitment and their desire to ensure its continuity and development. Fortius – Recognized expertise in art storage and logistics Located at the Luxembourg Freeport, the world’s second largest free port dedicated to art, Fortius is a key player in the storage and logistics of works of art. Thanks to its high-security infrastructure and optimal conservation conditions, the company provides a secure environment for the collections entrusted to its care. In addition to storage, Fortius offers complete collection management, including transport organization, customized packing and crating, as well as administrative and customs management. Active for over 10 years, the company generates sales of around 2 million euros. A strategic turning point for the company Claude Hermann, CEO of Fortius, comments: “This acquisition marks an essential step in strengthening our local roots and ensuring the continuity of our development. By taking over the company, we are consolidating our commitment to our customers by guaranteeing the continuity and excellence of our services. We would like to thank AKCEAN for its support throughout the process, as well as all the advisors who contributed to the success of this transfer.”
Vendor credit and Earn-out: Two levers to facilitate an M&A transaction
When acquiring or selling a business, finding common ground on price is often one of the main challenges. Differences in perception between seller and buyer as to the value of the business can slow down or even jeopardize a transaction. Solutions to overcome these differences include seller’s credit and earn-out. These two mechanisms, although pursuing different objectives, can be complementary and facilitate successful negotiations. AKCEAN can help you set them up and negotiate them to maximize your project’s chances of success. Vendor credit: structured financing to facilitate acquisition Vendor credit is a financing arrangement in which the seller agrees to defer payment of part of the sale price by granting a loan to the buyer. In other words, the buyer does not immediately pay the full amount agreed: a fraction of the price is repaid progressively, according to a negotiated schedule including an interest rate and, in some cases, guarantees for the seller. This mechanism is particularly useful for buyers seeking to optimize their financing, by enabling them to reduce their initial capital outlay, to supplement or limit their recourse to bank loans, and to access conditions that are often more flexible than those offered by financial institutions. In practice, the vendor loan can represent a significant proportion of the sale price, with repayment generally spread over two to five years. Its interest rate, often lower than that of bank financing, makes it attractive to the buyer. Although it involves a deferred payment, the seller’s credit differs from a simple instalment plan in that it is structured. Unlike a traditional deferred payment, which is based solely on an agreement to pay in several instalments, a vendor credit formalizes a financial debt with a defined interest rate, and may include guarantees (pledge, surety). It thus offers the seller greater protection in the event of difficulties on the part of the buyer. Vendor credit is particularly relevant in management buy-outs, where employees take over the company. Since they do not always have the funds to finance the acquisition immediately, they can use the company’s future profits to gradually repay the vendor loan. While vendor credit facilitates the transaction, it is not without risks for the seller, particularly if the buyer encounters difficulties in honoring its commitments. It is therefore important to assess the buyer’s solvency and financial prospects, while providing solid guarantees. Earn-out: a price supplement based on future performance An earn-out is a mechanism whereby the purchaser pays a price supplement conditional on achieving a certain level of performance after the sale. The criteria, defined in advance, may be financial (sales, profitability) or non-financial (retention of strategic customers, maintenance of key contracts, etc.). This mechanism is particularly useful when the seller and buyer find it difficult to agree on a fixed price, notably due to uncertainties about the company’s future performance, or when the seller feels that the growth potential has not yet been fully reflected in past results. In concrete terms, an initial price is determined, with a possible top-up paid according to the objectives achieved. This mechanism reduces the buyer’s risk, while enabling the seller to obtain a higher valuation if performance follows. It is often structured on the basis of the results achieved in the year of sale, particularly during the period of support for the seller. However, its implementation requires particular care. Performance criteria must be precisely defined, and calculation methods fully transparent. Failing this, ambiguities can lead to disputes, particularly if the seller is no longer involved in the management of the company after the sale. Vendor credit and earn-out: complementary These two mechanisms, far from being exclusive, can be used in conjunction to meet the buyer’s financing constraints, while ensuring that the seller receives a fair valuation for his business. For example, a transaction may involve an upfront payment, supplemented by a vendor loan spread over several years, and an earn-out based on future performance. This combination offers greater flexibility in negotiations, and aligns the interests of seller and buyer with the company’s long-term viability and growth. Are you considering a sale or acquisition and would like to explore these mechanisms? Contact our team for a personalized analysis to optimize and secure your transaction.
Valuation multiples – Q4 2024
When it comes to valuing a company, the comparables method is frequently used, especially for well-established businesses. This approach involves estimating a company’s value by comparing it with other similar companies, based primarily on their profitability. Although the best comparison is the multiple at which a similar company has recently sold, publicly listed companies, whose financial data is publicly available, offer an interesting point of reference for establishing valuation multiples for SMEs (small and medium-sized enterprises). The multiples observed on the stock market are generally adjusted downwards to take account of differences in size, increased operational risk and the lower liquidity of SME shares compared with listed companies. Discover the multiples by business sector that we have compiled below as at December 31, 2024.
Valuation multiples – Q3 2024
When it comes to valuing a company, the comparables method is often used, especially for established businesses. It consists in determining the value of the company in relation to other similar businesses, in particular by considering their profitability. Although the best comparison is the multiple at which a similar company has recently sold, publicly listed companies, whose financial data is publicly available, offer an interesting point of reference for establishing valuation multiples for SMEs (small and medium-sized enterprises). The multiples observed on the stock market are generally adjusted downwards to take account of differences in size, increased operational risk and the lower liquidity of SME shares compared with listed companies. Discover the multiples by business sector that we have compiled below as at September 30, 2024.
Valuation multiples – Q2 2024
When it comes to valuing a company, the comparables method is often used, especially for established businesses. This involves determining the company’s value in relation to that of other similar businesses, in particular by considering their profitability. Although the best comparison is the multiple at which a similar company has recently sold, publicly listed companies, whose financial data is publicly available, offer an interesting point of reference for establishing valuation multiples for SMEs (small and medium-sized enterprises). The multiples observed on the stock market are generally adjusted downwards to take account of differences in size, increased operational risk and the lower liquidity of SME shares compared with listed companies. Discover the multiples by business sector that we have compiled below as at June 30, 2024.
Valuation multiples – Q1 2024
When it comes to valuing a company, the comparables method is often used, especially for established businesses. It consists in determining the value of the company in relation to that of other similar businesses, in particular by considering their profitability. The publicly available financial data of listed companies is used to compile sector statistics on valuation multiples, such as those presented in the document below. In SME valuation, these multiples serve as a benchmark, but must be interpreted with caution. They are generally adjusted downwards to take account of differences in size, increased operational risk and the lower liquidity of SME shares compared with listed companies. The best comparison is to know the multiple at which a similar company recently sold.
Asset and liability warranties: an essential part of any transaction
When acquiring a company, risk management is of paramount importance. One of the key elements in this respect is the implementation of an asset and liability guarantee. This protects the acquirer against potential errors or omissions in the company’s balance sheet, as well as against any unfavorable post-sale balance sheet variations that could be attributed to previous management. AKCEAN can help you negotiate this essential guarantee, which should be included in the initial discussions between the seller and the buyer. This guarantee has important implications for the seller, who may be obliged to block part of the sale price to cover any compensation. What is an asset and liability guarantee? An asset and liability guarantee is a commitment made by the seller to certify the accuracy of the assets sold and existing liabilities. It may take the form of a specific clause in the sale contract, or be included in an agreement appended to the contract. In the event of a discrepancy between the financial information provided and reality, or if events prior to the sale adversely affect the balance sheet, the purchaser may request financial compensation from the seller under the guarantee. Asset warranties : The purpose of the asset guarantee is to confirm the veracity of the assets presented in the balance sheet. These include intellectual property rights, real estate, equipment, fixed assets, inventories, trade receivables, other receivables and cash. The aim is to protect the acquirer against any inaccuracies concerning these assets, as well as against any reduction in their post-transaction value due to events occurring prior to the sale. Typical examples might be lower-than-declared inventories, missing equipment or uncollectible trade receivables. Liabilities guarantee : The liabilities guarantee guarantees the accuracy of balance sheet liabilities. These may include provisions, financial debts, supplier debts, as well as tax and social security debts. This guarantee offers protection to the purchaser against errors or omissions concerning liabilities, and against any increase in post-transaction liabilities due to pre-sale events. This may include the discovery of undisclosed debts, tax reassessments for periods prior to the transaction, employee disputes and litigation with customers or suppliers for pre-sale events. Content of the asset and liability guarantee To ensure the effectiveness and clarity of an asset and liability warranty clause, it is crucial to include key elements that define its operation and terms, agreed and accepted by both the acquirer and the seller: Identifying the guarantor : Clearly identify the parties responsible for the guarantee. When several sellers are involved, their commitment is not necessarily joint. Definition of beneficiary : Specify the beneficiary of the guarantee, which may be the acquirer or the acquired company. Scope: Specify the assets and liabilities covered by the guarantee, with reference to the relevant accounts. Duration of the guarantee : Limit the duration of the guarantee, generally to a period of 3 to 5 years, and align it with tax and social security statutes of limitation. Guarantee amount: Set a ceiling, often representing between 10% and 30% of the sale price, depending on the risk assessed by the buyer during the acquisition audits. The amount of the guarantee may be subject to degression over time. Trigger threshold : Establish a minimum threshold enabling the guarantee to be activated only for significant amounts. A fixed amount (deductible) to be borne by the purchaser can also be set. Activation procedures : Specify the steps the purchaser must take to activate the warranty, including the form, deadlines and justifications required. Guarantee of the guarantee: Consider measures against the insolvency of the guarantor. Additional measures are usually provided for, such as a first-demand guarantee, bank guarantee, mortgage or pledge. Although this list is fundamental, it is not exhaustive. The drafting of a guarantee of assets and liabilities should be entrusted to a legal professional to ensure its accuracy and effectiveness. In practice, an assignment contract lists a series of declarations made by the assignor concerning the company’s situation. This includes its management, ownership of shares, accuracy of accounts, details of assets and liabilities, off-balance sheet commitments, current or potential disputes, personnel, contracts, tax obligations and compliance with regulations. It is agreed that any loss resulting from an omission or inaccuracy in these statements shall give rise to compensation. Acquisition audits play a crucial role in providing an in-depth analysis of the risks associated with the business and the transaction. These audits help to establish specific representations and warranties, thereby reinforcing the buyer’s protection. Last update: January 2024
