What is a Private Equity Group? and What Do They Look For When Making an Acquisition?

What is a Private Equity Group?
What do they look for when making an acquisition?

Brian E. Christian, CPA, MBA

Before we address the unique nature of private equity groups, I’d like to impart a bit of sound advice:

If you are, or someone you know is, serious about harvesting a lifetime of work and entertaining the idea of selling a closely held business; the biggest favor you can do for yourself, or them, is to introduce them to The Exit Strategy Handbook. As someone who has read scores of books on the subject of business exit planning, I can personally vouch for this book and the accompanying software package as being the finest in its field. It truly is The BEST Guide for Selling Your Business.

On page 12 of The Exit Strategy Handbook, Jerry Mills only briefly mentions Private equity groups (PEGs) as one option among several that may be interested in acquiring your closely held middle market business. In order to determine if a PEG would have an interest in acquiring your company or that of someone you know, it is usually a good idea to have an idea of how they work and what they look for.

Private equity groups will usually raise capital by seeking out high net worth individuals or investment funds to be investors in their firm or group.

Frequently Asked Questions (FAQs):

  1. What does a PEG do with the equity capital they raise?
    PEGs look to acquire a significant minority share, a controlling interest or 100% ownership in one or more portfolio companies. Once these investments are made, they look to maximize their long term value.
  2. How do the investors in a PEG earn a return on their equity investment in the group?
    PEGs and their investors usually receive periodic (monthly or quarterly) management fees from the portfolio companies they own and manage as well as a share of the profits generated by their portfolio companies, usually called a “carried interest”.
  3. What is a PEGs typical investment horizon and strategy?
    PEGs, as opposed to hedge funds, usually take a longer term, buy and hold perspective with respect to their portfolio companies.  They usually seek out industry segments in which their principals have experience and expertise.  Given the experience and expertise of their principals, the PEG will almost always assume operational or executive leadership roles in their portfolio companies in order to manage their risk and achieve their long term growth objectives.
  4. What is their “end game”?
    Just as you, as a current business owner, are contemplating now- a PEG always begins with their exit in mind. When contemplating an acquisition, they consider the possible ways that they can receive the ultimate return on their investment and whether or not the company they are contemplating acquiring would be a candidate for one of the following transactions:
     -An Initial Public Offering (IPO) in which shares of the company are offered for sale to the public on a regulated exchange.
     -A merger or acquisition in which the company could be sold for cash or shares in an acquiring company.
     -A recapitalization in which their interest is monetized and paid to them through one (or a combination) of the following:
    • Operating cash flow,
    • Raising debt, or
    • The sale of equity to other parties.

While there are several distinct types of buyers for today’s closely held, middle market business, not all are created equal and it helps to know what they look for in order to position yours in the best possible light to draw their interest. I hope you found the above informative and insightful.

photo credit: Famous investment quotes via photopin (license)

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