Financing and Capital Markets

Evaluating Private Equity Investments

Evaluating Private Equity Investments
 

Private equity investments have enjoyed tremendous growth in recent years. In 2013 alone, private equity groups invested $443 billion in over 2,300 companies. The value of private equity-backed IPOs is well over one trillion dollars since 2001 (Private Equity Growth Capital Council, 2015).

There are many companies that can benefit from an influx of capital in exchange for a three to seven year majority or minority ownership investment provided by a private equity investment. A recent SunTrust study of 532 business leaders shows that twenty percent are pursuing private equity group investments.

How Private Equity Works

Private equity investments can be structured in a variety of ways to meet the goals of private companies. The overarching idea of private equity investments is access to additional capital in exchange for a sale of a partial ownership interest to a private equity investor who is interested in the future growth and expansion of the business. Shares sold can represent a majority or minority ownership stake depending on the company needs and long term strategy. Investors typically receive board seats to help guide the use of their invested capital while the existing business owner and management team continue to run day to day operations. Private equity group involvement can offer capital for growth (both investment and working capital), provide liquidity for equity holders and infuse industry and/or operations knowledge to the business.

Private equity can take many forms.  For example, funds and expertise might come as a minority investment from a private equity venture capital fund in the early stages of technology company’s development.   Alternatively, mature companies with an eye for stable, sustainable growth may receive a leveraged buyout of a majority equity interest. Varying types of private equity investments include angel funding, family funding, restructuring and hands off/monetary. Each form of private equity can be tailored to the specific needs of a business and its owners.

When to Consider Private Equity

Given private equity investment flexibility, a large variety of companies are candidates for this capital and expertise.

Companies That Have Identified Expansion Opportunities: Companies with a stable financial situation that are looking to expand by acquiring a related company or starting a new division can utilize private equity sales to fund their expansion. Such companies have an opportunity to gain valuable industry expertise through private equity infusions. In addition to gaining funds for acquisitions or other expansion opportunities in exchange for shares, many investors participate on corporate boards to provide assistance in the direction of the company. This allows companies to seek out investors with industry specific knowledge that can help guide expansion efforts.

Owners Looking for and Exit Strategy: Business owners with successful companies that are not yet ready to sell, but have plans to sell within five to seven years may seek private equity to continue to grow while they are still managing the company.  They can use the capital and experience of the investors to guide an IPO or sale of the company down the road.

Companies with Heavy Debt in Their Capital Structure: Some companies have expansion opportunities, but are saddled with a high percentage of debt in their capital structure that limits their ability to secure funds for investments. These companies may be attractive to private equity investors who are able to alleviate some debt by substituting equity investments to allow for expansion and growth. Private equity investors are typically willing to assume higher risk investments and may be a better alternative for companies with debt.

Family Owned and Managed Companies: Family companies are often characterized by a stable, long term investment mentality and high customer satisfaction and loyalty. Private equity groups are attracted by the lower risk investment and business positives that these characteristics bring.

Considerations for a Private Equity Sale

There are a few basic items to consider when preparing to solicit or entertain offers from a private equity group. First, compile a story that highlights the successes of the management team in terms of market penetration, profitability and growth.  It should demonstrate how additional capital resources can be employed to generate attractive returns for potential investors. Consider the structure of the funding based on capital needs and liquidly goals for the company as well as the desired term of an equity investment. Vet each investor based on how well their expertise aligns with company goals and culture. Private equity groups vary greatly in size, expertise, level of involvement with investor companies, culture and limited partner goals. Finally, consider the terms of the purchase (private equity group board seats, investment duration and exit strategy) and evaluate the effects with respect to the future of the company.

Getting Started

Start your exploration of private equity investment with a valuation of your business. This gives a holistic view of company performance, track record and future potential. Reach out to all valued financial advisors including your CPA and attorney. Use your SunTrust Relationship Manager to help you explore private equity group investments.  From preparing the proper growth story, to making contact with potential investors and selecting the best investor, your SunTrust Relationship Manager can lend valuable insight and guide you through the intricacies of this process to help grow your business and to provide the appropriate exit strategy.

 

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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