Transforming an overlooked subsidiary of a bigger company into a standalone market leader demands skill and expertise and is enormously rewarding when done well, writes Pontus Pettersson

There are many rewarding aspects of working in private equity. Among the best is taking a non-core subsidiary and turning it into a global market leader.

It’s rewarding because buying and making a success of what was just one small component of a company isn’t easy. It’s hard to find the right targets, negotiate the right price, execute the deal and disentangle the business so it can stand on its own. It’s also important to retain staff and keep management onside during what is often a big cultural shift. Then you must grow the business and finally secure the right exit. At every turn, there are risks and challenges. But when you get it right, you know you’ve done something transformational.
 
Companies have been divesting – also known as carving out or spinning off – non-core operations and divisions since the second half of the 20th century. And it’s a trend we anticipate will continue for the foreseeable future.

Such non-core units come in all shapes and sizes – one of the largest, for example, was TK Elevator, sold by thyssenkrupp in 2020 to a private equity consortium that included Cinven funds, Advent and Germany’s RAG foundation for €17.2 billion. At the other end of the scale, some units have been sold for as little as $1.

Cinven funds have a long track record of investing in what are sometimes also called corporate orphans – businesses or divisions that lose their strategic significance because of changes in the parent company’s overall goals. Besides TK Elevator, the Cinven funds’ portfolio of carve-outs includes: Arxada, spun out of healthcare giant Lonza; environmental science specialist Envu, from pharmaceutical, consumer health and crop science leader Bayer in 2022; and more recently, Master Builders Solutions, from construction chemicals giant Sika Group.


Creating a market leader

The key difference between making a growth investment – often in a business being sold by a founder or family – and investing in a carve-out is that the former has an established strategy that has proven successful. You’re investing to back that strategy, reinforce it in some areas, build and help manage growth. With a carve-out, you’re creating an entity that didn’t exist on its own [outside of it’s group]. You’re taking a business that typically is fundamentally sound, but which may have been overlooked – after all, it was non-core. These businesses often have great intellectual property. The goal is to use this to make them independent champions, with their own dedicated strategy.


Envu illustrates this well. With revenues of about €600 million in 2021, Envu was a small subsegment of Bayer’s Crop Science division and contributed just over 1% to parent Bayer’s sales of €44 billion. It was a leading business in the environmental science niche, generating resilient growth and high margins, but did not move the needle for the parent, and as a result wasn’t receiving the strategic, organisational and capital focus to take the business to its full potential. Since Cinven funds invested, Envu was stood up as a focused, pure-play, independent business, accelerated organic growth through pricing, share gains, R&D and in-licensing partnerships, as well as established itself as the leading consolidator in a fragmented market with three acquisitions.


TK Elevator (TKE) is another example that had great intellectual property and products – among the best in the world [for its sector] – but as part of thyssenkrupp was not getting the required focus. When Cinven funds invested, adjusted EBITDA margin was around 13%. Today, it exceeds 17%, approaching that of industry leader Otis. Achievements include developing and launching in record time EOX, a competitively priced, innovative, eco-efficient and digitally native elevator platform for the low-rise market. TKE refined its go-to-market approach for EOX – its increased operational efficiency.


It was a similar playbook for Master Builders Solutions. Spun out of Sika in 2023 during the construction downturn, today it is a leading concrete chemical admixture specialist that has grown significantly in its core markets of North America, Europe, New Zealand and Australia. It has also entered six new countries – Mexico, India, Turkey, Panama, Brazil, and Dominican Republic – opened eight new production sites, expanded into concrete repair and waterproofing, and completed the first of a planned series of acquisitions.


Investing in staff and infrastructure


Subsidiaries often share with their parent a lot of back-office functions, technology and computer systems. Extricating them and setting up their own infrastructure can be time consuming and complicated. Before Envu was carved out of Bayer, for example, it didn’t have its own supply, finance, legal and HR functions, and more than 200 people, including at top level (out of a total workforce of c. 900 today), needed to be hired to stand up a viable independent business. Also, as part of the carve-out, Bayer envisaged an immediate IT separation with a new ERP, which was complex to implement and caused some disruption in processing orders in the weeks post-closing.


Quantifying these risks in terms of time and money before the transaction is hard and can only be based on estimates. Even with the best brains and lots of experience, you can still get it wrong.


Success also depends on taking the employees and management with you. This means preparing them for cultural change. The time taken before the deal to get to know senior management and explain your strategy and goals is time well spent. It definitely helps convert trepidation into excitement and optimism.


The same is true of town hall-style meetings – either in person or virtual – with wider groups of staff after the deal. We often hold the first few board meetings in relevant locations around the world, perhaps an R&D centre in Italy or a sales office in Singapore. This is a great way for the company to get to know us better – and vice versa.


It’s also vital to set the right targets. There’s no rule of thumb for this. The process depends on the business, the people, the market. It must be iterative. Ultimately, though, your target has got to be for the company to become the best it can be – and ideally the best in its sector. Everything should work towards that outcome.


When you find the right target, do the right deal, set it up to stand on its own, motivate management and staff, invest in R&D, then growth and profitability should follow. Many of Cinven’s former corporate orphans are now sector heroes with happy customers. That’s when you exit, because you have been able to create value, which makes your investors happy. And that is why corporate carve-outs are among the most rewarding challenges in private equity.