The goal of every private equity transaction is to unleash a company’s untapped potential. But carve-outs have an added twist: The “company” in question isn’t a company yet.
In most successful carve-outs, a line of business is lifted out of a corporation and launched as a standalone entity. The transactions can be complex, risky, and require an enormous amount of analysis, planning, and operational engagement. If they are done right, however, both the parent company and the new business can benefit. Large corporations can shed non-core businesses and focus on their strategic priorities. Businesses that were underappreciated or undercapitalized within a broader organization can thrive with more strategic attention and investment.
Over the last 48 years, our private equity teams have completed more than 60 carve-outs. This deep experience has helped us create repeatable playbooks for due diligence, the transition to a standalone business, and value creation.
Starting at the Beginning: A Vision for an Independent Company
The best carve-out candidates are already successful. They may have best-in-class products or services, loyal customer relationships, or a strong position in a growing market. Importantly, though, they are not at the core of the parent company’s strategy. Therefore, they typically do not get enough capital or strategic focus to reach their full potential, according to Nicholas Zeitlin, Co-Head of KKR’s operations team in the Americas. KKR has a deep bench of executive advisors, industry experts and operational specialists that work collaboratively with KKR investment professionals and portfolio companies to build more valuable businesses through initiatives such as investing in sales, marketing, and channel to accelerate revenue growth, investing in product development, reshaping a company’s strategy to position it for future growth, and acquiring businesses that offer access to new technology, products, or markets. “Step one for me is to have a vision for what a company could achieve on its own if it were independent and had all the right resources,” Zeitlin said. “What could we do differently or better than is being done today?”
Omnissa, a company KKR funds acquired in 2024, is a prime example. Omnissa was the end-user computing division of VMware, which was itself acquired in 2023 by a large technology company. The business developed software that allowed large enterprises to securely deliver and manage applications, desktops, and data across any device or platform. Horizon, a leading desktop and application virtualization platform, and Workspace ONE, a digital platform that helps IT teams manage all of a business’ devices and apps from one place, are Omnissa’s key products. Both are leaders in multi-billion-dollar segments that we expect to grow every year for the next 5-10 years.
Even under VMware, there was no specialized sales team or channel strategy for Horizon or Workspace ONE; sales reps were responsible for selling a host of other products. Under its new owner, the group became subsumed into an even larger organization that was not focused on end-user computing as part of its broader strategy. This created an opportunity for KKR funds to acquire a strong business with attractive tailwinds that was only a peripheral focus in its current corporate structure, according to John Park, who leads the Technology Industry team for KKR Americas Private Equity. Park and his team felt that focused sales efforts and a channel strategy tailored to end-user computing could drive growth and create significant value for customers.
The Rules of Disengagement
Most scaled businesses evolve from startups to mature businesses with sophisticated, specialized processes and systems, as well as a full complement of employees in every function, over the course of years or even decades. Carve-outs generally must evolve into fully functional companies in a very short period of time.
For that reason, cost and complexity are important factors to evaluate in carve-out due diligence. Zeitlin and Park say complexity should never be a reason for an experienced, scaled private equity firm to walk away from a deal; in fact, it may be an opportunity to offer a differentiated perspective on the business’ potential.
“Underwriting the risk of a complex carve-out is very difficult, so it’s paramount that you manage the risk-adjusted return,” Park says. “We think our experience, broad capabilities, and the partnerships we’ve built up over the years allow us to underwrite more attractive returns with less risk than others might think is possible.”
Some businesses already operate essentially independently within the parent company, with separate management teams, product developers, sales teams, researchers, and even support functions like human resources and IT. Other times, those critical functions are shared, and the buyer and parent company must partner closely to negotiate how personnel, costs, intellectual property, and manufacturing facilities will be separated. Functions such as information technology, legal, human resources, and marketing may also need to be disentangled. Sometimes, a new legal entity (or 15 of them, as in the case of one recent KKR carve-out) must be established. This is where experience can make a big difference.
“On day one of most private equity acquisitions, the ownership of shares is the biggest change,” Zeitlin said. “The day after the transaction resembles the day before in terms of operations. In a carve-out, that’s not true. If you can’t build the capabilities to send invoices, disburse cash, report accurate financials, make payroll, answer customer service calls, and a whole bunch of other things on day one, the company will not work.”
Sometimes that means building new teams from scratch. Omnissa, for example, hired hundreds of people in multiple countries in just a few months to handle functions or capabilities previously provided by the corporate parent, and to support the company’s new growth plans. In another recent carve-out, the company needed to hire an entirely new executive team within the first 12 months of KKR’s ownership.
Value Creation Stays on the Front Burner
Carve-outs can falter if growing and improving the business takes a backseat to the details of the transition. KKR investment teams and Capstone team members partner closely with the portfolio company’s management team as they focus on the details of the transition while concurrently driving big strategic initiatives. In the Omnissa transaction, for example, there has been significant early progress in adding key hires in particular regions, creating a channel program, rolling out the new brand, and improving product development.
“Even in our first year, we want to be making big commercial decisions rather than spending all our time worrying about how to stand up the business,” Park says. “Being able to rely on our internal network of resources, who have executed our carve-out playbooks dozens of times, provides us a real competitive advantage.”
The Potential of a Clean Slate
Helping a new company stand on its own is complex and carries risk, but it is also a unique chance for a business to start fresh, building itself into an independent entity from the ground up. Ideally, management teams should be excited by these possibilities. In fact, one of the few red flags Park says can make him walk away from a carve-out is a sense that the business is happy with where it is.
“It’s a bad sign if management isn’t enthusiastic about the prospect of being independent and isn’t overflowing with ideas on how to accelerate the business as a standalone entity,” Park said. “If management teams are not clearly feeling that the mothership is preventing them from achieving their full potential, that’s an indicator that a carve-out may not work.”
KKR’s operational and industry experts can often help a company radically simplify systems and processes to fit a smaller, more agile company’s needs. New companies also have the freedom to reimagine their brands and culture. KKR’s Private Equity strategies in North America have committed to implementing broad-based employee ownership programs at every newly acquired company, giving most employees an equity stake in the company they work for, which we have seen improve employee engagement, productivity, and profitability at the companies we own.
Joy Lim, who is project managing the Omnissa transition efforts for the KKR team, said that the most gratifying part was meeting employees after they were officially transitioned to Omnissa employees, after months of collective hard work to prepare for the transition.
“Even simply walking into their own office space was deeply symbolic and energizing to the team,” Lim said. “It was inspiring to see everyone’s excitement at their fresh start, as a new company, with new possibilities, charting its own course.”
