What's a home run and a zombie in the realm of Private Equity?

A home run, in the world of baseball, is when the batter manages to make a full lap around the field, earning the maximum score. A zombie, as you probably know, is a living dead. But what do these two concepts have in common? No, it’s not the title of a movie coming out next Friday the 13th. These two terms also have a certain relationship in the world of private equity investment.

Both are used to classify companies based on how they meet the milestones of their business plan.

One of the main advantages of investing in private equity funds is the diversification we achieve. By investing in multiple companies, the fund limits the risks that some of them may not meet expectations and increases the chances of having true success stories within the portfolios.

Specifically, the term "home run" is used to designate those companies that greatly exceed the fund's expectations by offering exceptional returns in a short period. These investments, therefore, have a significant impact on the fund's performance, compensating for other investments that may have been less successful.

On the other hand, there are companies that end up as “living dead” within the funds because they do not generate the expected returns or meet the growth objectives and business plan. They find themselves, therefore, in a situation of stagnation or underperformance.

Generally, due to their situation, they require special attention so that the General Partners (GP) can implement the necessary changes and revive them.

When managing a “living dead,” funds can follow different strategies:

• Financial restructuring: The fund works on restructuring the company's debt, renegotiating with creditors, and seeking ways to improve its financial position.
• Management change: If the company has management issues and difficulties following the business plan, the fund can take measures to change the leadership and direction.
• Exit strategy: In some cases, the fund may decide that the best option is to exit the investment and look for a buyer or a merger with another company.
• Additional capital injection: The fund may decide to invest more capital in the company to provide the necessary funding to overcome current challenges.

It is important to note that not all “living dead” have to end in failure. In many cases, with the right direction and the capital provided by the fund, they can recover and achieve success.

Author

Sofía Cisneros

Communication and content - Crescenta