When should a private equity firm hire an investment bank for a deal? What value do they add? (1 min)

Most mid-market PE firms can execute acquisitions without the advice of an investment bank, since their team often consists of ex-bankers with deal experience and modeling experience. However, selling a portfolio company or doing an IPO of a portfolio company is not something a PE firm can do by themselves.

Selling a company requires reaching out to many potential acquirors. This is quite time consuming and PE firms simply don’t have the staff to do this. More importantly, investment banks already have an existing network of both strategic and private equity buyers, and they will have a sense of the appetite and strategic goals of each buyer as they will have interfaced with many of them. In addition, investment banks are able to market the deal in a relatively confidential way, providing 1-page “teasers” without giving away the name of the company. PE firms are able to do this, since it will be easy to figure out which company they are selling simply by looking at their portfolio on their website.

IPOs are also complex and must be executed by an investment bank. The bank needs to underwrite the deal and bring third-party legitimacy to the IPO so that both institutional investors and retail investors feel confident that the facts being presented have been vetted. In addition, the bank will do a roadshow and sell the IPO to institutional investors before the listing date, also known as creating an orderbook. This is crucial for the success of the deal.

For larger deals done by megafunds, investment banks are almost always hired even for acquisitions because of the complexity and size of the deal. The investment bank acts as a third-party check and can help out with due diligence of each segment of the target company, which can be quite significant. Having an investment bank help out with large acquisitions also helps bring legitimacy to the deal and will provide comfort to institutional investors in the fund.