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Joe Wagner Michele E. McHale
February 4, 2019 Article 2 min read

Innovative private equity groups are solidifying relationships with investment banks to gain greater internal horsepower, increase deal throughput, and optimize exit timing.

Two male businessmen talking with their investment banker.

As competitive pressures on private equity grow, success still comes down to investment returns. The traditional metric — internal rate of return (IRR) — remains paramount, but innovative private equity (PE) firms are finding new ways to optimize operations. Their objective? To increase deal throughput and remain agile and responsive to new opportunities — and to exit timing.

PE firms are using a range of strategies to improve their operations. Current trends include recruiting pre-MBA staff for (less expensive) analyst roles and parachuting in (more expensive) operating executives to gain specific expertise. But the strategy with the greatest potential to positively impact an exit is adding an investment banking advisor to the PE fund team.

Why you should work with an investment banker

Working with an investment banker on a retainer or advisory basis to manage financing strategies and to secure debt capitalization is a smart move when it comes to exit planning. Ongoing engagement with an investment banker enables your fund to better position itself to take advantage of often-short exit windows and optimize exit timing.

Working with an investment banker on a retainer or advisory basis to manage financing strategies and to secure debt capitalization is a smart move when it comes to exit planning

By keeping a finger on the pulse and trendline of your business, your industry, and credit markets, an investment banker can help guide your strategies for recapitalization or, when the return is likely to be more favorable, an exit.

Given that the average PE firm has over $200 million of potential liquidity sitting on its balance sheet ripe for recapitalization, initiatives aimed at streamlining the recap process — including leveraging an investment banking firm’s relationship with lenders to secure optimal financing terms — make even more sense.

The benefits don’t end there. Working with an investment banker allows PE funds to redeploy internal staff resources to higher value-added activities. For vice presidents and associate-level staff, this means a greater focus on deal-sourcing, value creation, and exit planning.

While it’s common for equity funds to have an investment bank that regularly helps with deals, it’s still a rarity for funds to have an investment bank on retainer to recapitalize portfolio assets on an ongoing basis. The trendsetting funds that do are onto something. These firms are better positioning themselves to take advantage of exit windows. And better positioning means greater probability of a faster close and, at the end of the day, securing a higher IRR on your investment.

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