Value Arbitrage

class="textPage">Many smaller companies are often ignored by analysts because of their size and lack of media exposure. Sometimes the investor relations department of smaller public companies may not be too skilled at developing the right relationships with investment bankers.

class="textPage">Many publicly traded companies are simply poor at marketing themselves to investors and traders. For this reason private equity firms which are experts in identifying value companies can take advantage of smaller companies being undervalued. Private equity firms analyze details of a company from employees to departments as well as management.

class="textPage">The firms also have very good relationship with lenders and buyers. What is surprising is that the funds need to improve upon each of these variables minimally to change the value of the company as a whole by a large amount. The funds often will sell the company through an IPO or a strategic buyer.

class="textPage">For example Apax Partners and Hicks Muse, Tate & Fust bought publisher Yell from BT Group for 2.1 billion GBP in 2001. They raised 1.14 billion GBP in 2003 one of the biggest UK IPO’s.

class="textPage">Apax increased the value of its stake by 300 million pounds. During the 1990’s Apax invested 2.9 million Euros in Autonomy Corp and following the IPO returned a profit of 239 million Euro.
Today sellers of companies are aware of the increase in value that the private equity firm creates which is the reason why buyouts are transacting at higher EV/EBITDA ratios.