PE Is Pouncing as Companies Spin Off Businesses to Raise Cash

Private equity firms have become more careful about the due diligence process amid rising borrowing costs.

Illustration by II

Illustration by II

In an effort to raise much-needed cash, more private companies are spinning off non-core businesses. And private equity firms are eagerly buying.

Forty-nine percent of corporate M&A professionals at private companies say they are likely to spin off a non-core division in 2023, according to a recent study by Deloitte. Forty percent of M&A staffers at these companies say they are likely to sell one to two businesses this year, while 7.5 percent say they are likely to pursue three to four divestitures.

The study is based on a poll of more than 520 M&A professionals, including employees on companies’ corporate development teams and staffers involved in pre-deal financial due diligence and post-merger integration. Most of the respondents are based in the United States.

“During the boom time, a lot of people’s focus was more on growth through acquisition,” David Oberst, partner in mergers and acquisitions at Deloitte, told Institutional Investor. “But in periods where there’s less acquisition activity on the M&A side, a lot of companies use that time to look internally and assess their own portfolio to determine if divestitures of non-core assets make sense…I think that is the trend that we are seeing in today’s market.”

Jinny Choi, private equity analyst at PitchBook, said there was a jump in divestitures around 2009, when distressed companies sold their assets for much-needed cash. A similar trend has picked up since late 2022. The buyers are mostly private equity firms looking to expand their platform companies through carve-out deals or organizations seeking to acquire peers in similar industries, she said. Carve-outs represented 7.6 percent of the total value of private equity deals in the fourth quarter, up from 5.1 percent in the third quarter, said Choi.

“Private equity firms are picking up these smaller, spun-out corporate-owned assets to inject additional operational efficiency or scale onto their platform companies,” Choi said. “The vast majority of carve-out deals that we saw in the private equity space were add-on deals.”


For companies contemplating divestitures, over half of them (54 percent) said they are most likely to pursue a simple sell-off — the sale of a business unit to another organization. But 14 percent are considering spinning off a business unit through an initial public offering, according to Deloitte.

Buyers, including private equity firms, have become more careful about the due diligence process than they were during the peak M&A market in 2021, according to Oberst. “We typically see less emphasis on diligence in a seller-driven market as buyers compromise to get deals done, but that’s not what’s happening,” Oberst said.

“Borrowing costs have gone up, but valuations have yet to come down. As a result, buyers are holding fast to diligence as a means to justify paying a perceived premium on assets and sellers should focus on getting their houses in order to meet that challenge and help seal deals.”