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A Closer Look at Private Equity

Private Equity

Posted by Jeff Muir on 5 December 2017 | Comments

I’d like to spend some time this week on a concept often misunderstood by those who do not spend a lot of time in the M&A marketplace; Private Equity.  In its simplest form, it is two or more individuals investing in a full or partial ownership of a company.  This can take the form of three or four friends pooling resources to buy a company.  We refer to these alliances as “three people and a checkbook” and have done many successful transactions with these investors.  

The better-known form of Private Equity (PE) is a larger group of investors (individuals and institutions such as an insurance company or pension plan) whose pool of money is invested in a company by a team of professionals who then hire managers and populate the board of directors. Most PE firms have investment criteria which include industry focus, target revenue size and minimum EBITDA levels, and may include geographic preferences.  In our experience, no two firms have exactly the same criteria or focus,  which is why we keep a database of the investment criteria for more than 2,000 PE firms so we can focus on the ones who will be most interested in the companies we represent.

Unlike the smaller group above, these PE groups have several layers of employees:

  • Associates, often freshly minted MBAs whose job it is to scour the country looking for deals that fit the firm’s “mandate” or investment criteria. Business owners will often hear directly from this group.  They are hunters looking to bring deals to those higher up on the food chain.  They vet the deal to move it up the chain of command.  They are gatekeepers, not decision makers often reviewing more than 200 businesses per year.  
  • Operating Partners, this group provides industry knowledge during the evaluation process and often become part of active management after the transaction is complete.  If the opportunity gets beyond an initial conversation, this group will do preliminary evaluation and make the recommendation to the investment team whether to pursue the transaction. 
  • Investment Partners/Managing Partners, typically the decision makers on whether to make an investment and at what price. They often have their own money invested in the fund. They review multiple deals per month and only select a handful opportunities a year in which to invest.

When speaking with Private Equity firms it is important to know where in the hierarchy the contact is and what information they need to move the process forward.  It is equally important to know what types of investments are most attractive to the firm’s decision makers before presenting any information. A PE firm's funnel of potential targets is large which can lead to many fruitless conversations in which owners invest their hopes, sensitive data and time to no avail.

At Beacon, we have a large database of Private Equity firms and know what types of deals they find most interesting.  We can also help you steer clear of groups that take the data never to be heard from again or may be bottom fishing for an owner looking to exit at a discount.  If you would like to learn more about what attracts Private Equity investors to an opportunity, please let us know.