Justin Chen, Francisco Partners

Francisco Partners will be on the lookout for carve-out opportunities this year as companies focus on shedding core assets in the market downturn.

Justin Chen, partner at Francisco, sees a ripe market for carve-outs similar to the firm’s purchase of bswift, a provider of benefits technology and services, from CVS.

“The current challenging macro-economic environment coupled with corporates that are focused on how they can improve shareholder value (e.g., slimming down portfolios and/or refocusing strategy) will result in a lot more divestiture activity. We are having a lot of these conversations across the landscape,” Chen said.

The San Francisco-based PE firm has executed 50 carve-out deals since inception in 1999, a key strategy for the firm as it looks to invest behind growing businesses.

Those types of efforts include Buyouts2022 deal of the year award winning transaction, Francisco’s carve-out of Capsule Technologies. Last year, Francisco sold Capsule to Royal Philips for $635 million, generating a 233 percent gross IRR and an about 11.9x gross MOIC, according to sources familiar with the deal.

In a more recent deal in October, Francisco Partners made a majority investment in Chicago-based bswift – a provider of software and services that streamline benefits and human resources administration, offering a cloud-based technology platform.

“The company’s financials and key metrics demonstrated a durable and quality business with 90-plus percent recurring revenue, multiyear contracts, impressive gross and net retention and a customer base that touches millions of lives in the US,” Chen said.

Firms are having to look harder for deals amid rising rates and more expensive and complex financing. Carve-out opportunities can at times present an interesting opportunity for firms to buy into developed businesses for cheaper prices.

“First, we understand the wants and needs of corporate sellers,” said Chen. “Corporates want to minimize disruption, move efficiently and have high certainty the deal will go through no matter the situation or the environment.”

Chen said the firm is a partner and buyer of choice for corporates as they evaluate divestitures and partnerships.

“In many of our carve-outs, the corporate parent really cares about who the buyer is, whether the go-forward owner will continue driving investment, and where the business is going.”

PE firms are on the lookout for companies that leverage technology to increase efficiency and save employees time.

“Covid helped accelerate an existing trend of employers focusing on the holistic relationship with their employees. We’ve seen companies expand their definition of ‘benefits,’ which historically focused on health insurance selection, but now includes other adjacent areas, such as financial products, wellness and health services.”