Carve-out transactions are complex and require a lot of time and work to close successfully. It helps a PE firm greatly if it has operating partners and investment professionals who have a particular industry expertise in the deals they are looking at. New York-based One Rock Capital Partners has completed 13 corporate carve-outs since 2012. In March 2021, One Rock purchased the Nestlé Waters North America business. One Rock co-founders Tony Lee and Scott Spielvogel spoke to Mergers & Acquisitions below:

What factors contribute to PE firms’ success when it comes to handling complex transactions?

In our experience, to successfully handle complex transactions, it is critical to have in-house expertise in order to be in control of the process, approach and outcome. At One Rock, our investment team works in close collaboration with our operating partners, comprised of both functional and industry executives, to build the management team and help them execute on a value creation plan. For example, from the outset, our operating partners can provide valuable operational know-how and a depth of expertise, which allows us to negotiate contractual agreements with the corporate seller covering areas such as niche services or products, among others. As such, our ability to execute on complex investments typically requires intense heavy lifting by the investment team with support from our operating partners that cannot be fully replicated by external consultants or stakeholders, regardless of their expertise and knowledge.

How should PE firms work with corporate parents and management teams to execute carveouts?

One Rock has completed 13 corporate carve-outs since 2012, and over the past 10 years we’ve found that each selling corporate parent has unique needs in these types of transactions that must be addressed. For example, in a typical corporate carve-out, the newly standalone company pays the former corporate parent for the continuation of services to support certain business functions (e.g., IT, HR, etc.) for a period of time until systems and infrastructure can be established in the new standalone company. In one of our recent carve-out transactions, the selling corporate parent was unable to offer us any transition services whatsoever. In that deal, we had to invest substantial time, resources, and capital to put in place practically all of the people, systems, processes and functions prior to closing our purchase of the business, so that the business could fully function as a true standalone entity on day one post-transaction. Solving for the seller’s constraints was critical to our success in closing the transaction.

Why would PE firms engage in corporate carve-out transactions given how complex they are? Can you share an example of one of One Rock’s recent carve-out transactions?

In any macro-economic environment, companies look to divest non-core parts of their business. BlueTriton Brands, formerly known as Nestlé Waters North America, is a prime example of a recent and large One Rock carve-out transaction. Nestlé had announced its intention to sell its regional water brands, including its purified water business and beverage delivery service in the U.S. and Canada in order to create a more focused business around its international premium water brands. In March 2021, One Rock purchased the Nestlé Waters North America business, the market share leader in North America to drive innovation, new product launches and increased market presence locally and nationally.

Are you seeing a rise in corporate carve-outs? Why do parent companies pursue these types of transactions?

Nearly half of all our platform deals completed to date have been corporate carve-outs, and we continue to see steady growth in the number of carve-out opportunities in our pipeline. Some reasons why a parent company would divest a business in a corporate carve-out include the desire to enhance the parent company’s earnings growth trajectory and/or profit margins, the need to unlock capital for growth investment in a parent company’s core strategy, and increasingly, pressure from an activist shareholder. We have found that businesses being divested can often greatly benefit from a fresh perspective and strategic repositioning, as well as the injection of capital and operational resources that private equity firms can provide.