The Private Equity market facilitated $512 billion in buyout deals in the first half of 2022. The biggest pain point of this industry is that they have too much capital and not enough reliable buckets to place that capital into. Our firm has talked to and created a Customer Relations Manager (CRM) of the 140 Institutional Banks, Family Offices, and Hedge Funds we have talked to the past two business quarters.
We have created an extensive tagging system so we know exactly what deals they are looking for, what sort of multiples they are willing to pay, and the amount of capital they are looking to allocate towards those categories the next 5 years so we can build our exit strategy in reverse, instead of buying a company, then trying to figure out the end buyer.
Private equity companies have been following several key trends in recent years:
1. Increased focus on growth-stage companies: Private equity firms have been increasingly focusing on growth-stage companies rather than early-stage or mature companies. This is because growth-stage companies tend to have more predictable revenue streams and are less risky than early-stage companies.
2. Increased focus on technology and e-commerce companies: As technology and e-commerce continue to play an increasingly important role in the economy, private equity firms have been investing more in these types of companies.
3. Increased use of leverage: Private equity firms have been using leverage (borrowing money) to finance their acquisitions more frequently. This allows them to invest more capital while also increasing their potential returns.
4. Increased focus on emerging markets: Private equity firms have been expanding their investment focus to include more international opportunities, particularly in emerging markets.
5. Increased competition for deals: As private equity firms have more capital to invest than ever before, the competition for attractive investment opportunities has become more intense.
Private equity investment in e-commerce enabled companies reached over the $12 billion the last 12 months. The e-commerce industry has been growing rapidly in recent years, driven by increased consumer demand for online shopping and the shift to digital commerce due to the COVID-19 pandemic. It is likely that private equity investment in these companies will continue to grow as the world looks for innovative ways to disrupt traditional investing.
CASE STUDIES
Intellectual Property
Acquiring intellectual property can be a valuable business strategy, as it allows a company to control and monetize the rights to certain products or ideas. This can include patents, trademarks, copyrights, and trade secrets. By owning these rights, a company can prevent competitors from using the same intellectual property and can also generate revenue through licensing or selling the rights to others.
One of the key benefits of acquiring intellectual property is the ability to resell it later on to a strategic buyer willing to pay a premium. This can be a significant source of revenue for the company and can help to recoup the costs of acquiring the intellectual property in the first place.
In general, the value of intellectual property rights can be measured by a multiple of earnings or revenue, similar to how the value of a company is determined. For example, a company may be valued at a multiple of its annual revenue, such as 5x or 10x. Similarly, the value of intellectual property rights can be determined by a multiple of the expected future revenue that it will generate.
In 2005, the rights to Elvis Presley’s music, image and likeness were sold by the Elvis Presley Estate to CKX, Inc. (now known as Core Media Group) for $100 million. This included the rights to Presley’s name, image, and likeness, as well as the rights to his music catalog and the rights to operate Graceland, his former home which was turned into a tourist attraction.
The acquisition of Elvis Presley’s intellectual property rights allowed CKX to generate revenue through licensing rights, such as clothing and collectibles, as well as through the operation of Graceland. The company also produced new Elvis-related content, such as the reality TV show “Elvis by the Presleys.” In 2012, CKX was sold to Apollo Global Management for $510 million, making the acquisition of Elvis Presley’s rights a significant financial success for the company.
Valuation
One benefit of business valuations is that they take into account a company’s financial performance, future growth potential, and other intangible assets such as brand value and intellectual property. This can be useful in assessing the value of a company in a merger or acquisition situation, such as Lululemon’s purchase of Mirror.
In 2019, Lululemon announced that it had invested $1 million in Mirror as part of a $13 million funding round for the start-up. At the time, the investment was seen as a way for Lululemon to gain access to Mirror’s cutting-edge technology and customer base, and also to test the waters before potentially making a larger investment in the company.
In 2020, Lululemon decided to invest more in Mirror, this time to acquire the company outright. Lululemon’s CEO Calvin McDonald has stated that the company was impressed with Mirror’s rapid growth and the positive feedback they had received from customers. Additionally, the COVID-19 pandemic had accelerated the trend of at-home fitness, making the market for Mirror’s products even more attractive.
In June 2020, Lululemon announced its intention to acquire Mirror. The deal was valued at $500 million in cash and stock.The acquisition was seen as a strategic move for Lululemon, as it sought to expand its digital offerings and tap into the growing trend of at-home fitness. By acquiring Mirror, Lululemon gained access to new technology and a loyal customer base, which would help the company to grow its digital presence and reach new customers.
Lululemon CEO Calvin McDonald has stated that the acquisition of Mirror is in line with the company’s goal of becoming a “digitally-enabled, experience-based” brand and it will help them to create an even more engaging and personalized experience for its customers.
Ability To Grow Revenue
Businesses have the ability to grow revenue through a variety of means, such as increasing sales, expanding into new markets, or introducing new products or services. This flexibility allows businesses to adapt to changing market conditions and capitalize on new opportunities.
On the other hand, real estate revenue growth is often tied to the appreciation of the property’s value and rental income. Real estate values can increase over time due to factors such as rising property values, changes in the local economy, or improvements made to the property. But revenue from real estate is not as flexible as a business, as it does not have the ability to increase sales or introduce new products/services, it rely mostly on the market conditions.
One historical example is the case of Amazon.com, which started as an online bookstore in 1995 and has since grown to become one of the largest retailers in the world. The company has expanded into new markets and product categories, such as electronics and fashion, and has also introduced new services, such as Amazon Prime and AWS, which have all helped to drive revenue growth. This demonstrates the ability of a business to adapt and grow its revenue over time, in contrast to the more static nature of real estate.
According to publicly available financial data, the company’s revenue has grown from around $34 billion in 2012 to over $386 billion in 2021, an increase of more than 1,000%. Additionally, the company’s net income has grown from around $631 million in 2012 to over $22 billion in 2021, an increase of more than 3,300%. This growth can be attributed to a number of factors, including the continued expansion of the e-commerce market, the company’s investments in new products and services, and its global expansion. It’s worth to mention that Amazon’s growth has also been driven by its cloud computing division, Amazon Web Services (AWS), which has become a major contributor to the company’s revenue and profitability.
Tax Strategies/Depreciation:
Tax strategies and depreciation can be beneficial when buying already cash-flowing businesses because they can help to reduce the overall cost of the acquisition. One common tax strategy used in business acquisitions is the use of depreciation to offset the income generated by the acquired business. Depreciation is an accounting method that allows a company to spread the cost of an asset over its useful life. By depreciating the assets of the acquired business, the acquiring company can reduce its tax liability, which can help to make the acquisition more financially attractive.
One example of a company that has used tax strategies and depreciation to save significant amounts of money is Berkshire Hathaway. The company, led by Warren Buffett, is known for its long-term investments in cash-flowing businesses. Berkshire Hathaway has used depreciation to offset the income generated by its portfolio of companies, which has helped to reduce the company’s tax liability and increase its overall profitability.
Another example is the company Apple, in 2016, the company repatriated $252.3 billion in foreign profits back to the U.S. at a special tax rate of 15.5%. The company had $214.8 billion of cash and marketable securities as of January 2017, and had saved around $44 billion in taxes by not repatriating the money earlier.
In 2019, Microsoft’s tax strategy saved the company around $4 billion. The company used a technique known as “earnings stripping” which allowed it to shift profits from its U.S. operations to subsidiaries in low-tax countries, effectively reducing its U.S. tax bill.
In particular, Microsoft transferred some of its intellectual property rights to subsidiaries based in Puerto Rico and Ireland, which have lower corporate tax rates than the United States. By licensing the rights to use these patents and trademarks back in the U.S., Microsoft was able to reduce its U.S. taxable income and lower its overall tax bill.