Middle-market companies are increasingly turning to the private equity markets to achieve their liquidity and growth objectives. In recent years, a tight credit market and conservative lending criteria severely limited the capital available from traditional commercial lenders. As a result, business owners are seeking financial partners who understand their business and are willing to make investments, and are finding results through private equity.
A convergence of opportunities
Private equity firms raise and manage large funds of capital with the goal of taking ownership positions in undervalued or undercapitalized companies.
The total dollars raised and total number of funds in the private equity sector have flourished, largely due to a strong demand for private capital, an accelerating economy in the 1990s and exceptional investment returns. From 50 private equity groups in 1985 to more than 2,000 firms in 2000, these firms are credited with raising more than $500 billion in funds.
Funds that originated during the height of private equity fund-raising in the late 1990s are coming closer to their life's mid-point, which means that many equity groups are facing a strong need to put their capital to work in an effort to hold and liquidate investments prior to returning capital to investors. This, along with a shift in the mindset of owners relating to valuation, provides middle-market businesses with a tremendous opportunity to tap into the vast capital resources of the private equity industry, gaining unprecedented liquidity.
What private equity firms offer you
Many people know of private equity groups because of their buyout activities. However, many prefer investing in recapitalization transactions, which allows them to partner with existing management and shareholders.
Purchasing less than 100 percent of the company --typically between 50 percent and 80 percent -- usually completes recapitalization transactions. This structure assures the private equity investor that management's incentives are aligned with investment return objectives, and managers are motivated to make the company a post-transaction success.
This type of transaction not only provides the company with access to a source of growth capital but also allows private company shareholders the ability to diversify their investment portfolio by reinvesting the proceeds -- which had been concentrated largely in the company -- across a broad number of investment vehicles.
Private equity groups also provide business and industry expertise, which can strengthen skill set gaps that may exist within the company. Private equity professionals have a proven track record of managing internal growth and assimilating acquisitions.
Also, equity groups often provide additional capital above and beyond the initial investment to fund add-on acquisitions, enabling the realization of additional growth and cost savings beyond management's initial transaction projections.
Successful equity partnerships
Investment and management styles, transaction structure and industry expertise are some of the primary keys to creating and maintaining a successful partnership.
It can be a daunting task to sort through the firms making private equity investments, and you'll likely find multiple firms that meet your criteria. So, how do you find the private equity groups that are right for your business, and how do you structure the optimal transaction for your company?
Find an investment bank focused on middle-market transactions, which can analyze your capital structure, model a transaction plan, create a competitive investment process to maximize your value and assist you in identifying and partnering your company with the right private equity firm.
The time is now. Michael McCoy (firstname.lastname@example.org) is a managing director with Crowe Capital Markets LLC. Reach him at (312) 899-7302.