The Daily Technical #12: In private equity, what is a capital call?

Good morning. Welcome to the 12th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What are some of the most common reasons that M&A deals fail to create value?

Start by clearly identifying the major reasons M&A deals fail to create value. Some of the key reasons are overpaying/overestimating synergies, inadequate due diligence, lack of strategic plan, and poor execution/integration:

• Overpaying/Overestimating Synergies: Paying a premium can eat into potential gains. Estimating synergies conservatively is vital, even if it means losing some deals.

• Inadequate Due Diligence: Thorough research is key. Factors like focusing on positives and a competitive auction can blur judgment.

• Lack of Strategic Plan: Having a clear, actionable strategy is essential for realizing synergies.

• Poor Execution/Integration: Strong leadership and a solid integration plan post-acquisition are necessities.

Common Mistakes

1. Ignoring the Need for a Strategic Plan: Without a clear vision, synergies won't be realized despite having more resources.

2. Underestimating Due Diligence: This can lead to underestimating the importance of understanding both benefits and risks.

3. Overlooking Cultural Factors in Integration: Cultural compatibility is a significant yet often overlooked part of successful integration.

Key Takeaways / TLDR

• Estimate Synergies Conservatively: Overpaying can make it impossible to justify the premium, even with positive results.

• Thorough Due Diligence: Focus on understanding both the assets and risks of the target company.

• Strategic Planning and Integration: Have a clear strategy and strong leadership to execute post-deal integration, considering cultural compatibility.

TODAY’S QUESTION
In private equity, what is a capital call?

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