Why business owners may find private equity attractive
There are two principal reasons private equity can be an attractive solution for a business owner.
First, private equity can be, and typically is, a great source of liquidity for the owner. Private equity valuations in current markets often are competitive with strategic valuations – and importantly private equity transaction structuring is becoming more flexible in meeting the needs of business owners.
The second reason is that private equity funds usually bring strategic and transactional expertise, which I discussed in answer to prior questions. See Private Equity: What Does It Bring To The Table.
When these two factors are combined, what we typically see with a private equity investor in partnership with the business owner and management is that the private equity fund will or may provide:
- significant equity participation incentive to continuing owners and management.
- business owners the opportunity to continue to invest a significant portion of their equity investment in partnership with the private equity fund while the private equity fund works with that owner to transform the business and get it ready for the ultimate exit, possibly to a strategic buyer or to another (usually larger) financial buyer.
Private equity as a business partner and ultimate business seller
One way of looking of private equity fund is that continuing business owners and management are partnering with a professional seller of businesses. This in circumstances where a private equity fund’s business is to surface or unlock value in their investee businesses and then realize that value ultimately through a sale.
A private equity fund typically wants management to stay involved and will want them aligned through continuing equity ownership.
When a private equity fund does its job effectively, both continuing owners and the management team effectively get a “double bump”. Firstly, continuing owners get realization of some liquidity through the private equity fund’s initial investment. Secondly, when the private equity fund executes its plan and ultimately exited the business, continuing owners and/or their management team also get to participate economically in the growth of the business during the private equity hold period.
Private equity funding is not “last resort funding”
Private equity funding is the exact opposite of last resort funding. Private equity wants to invest in healthy businesses where the owners welcome their involvement.
What private equity funds are very good at is helping transform good businesses into great businesses. Private equity is a proactive choice for private company business owners who want to maximize the value of their business while at the same time ensuring (as best it can be ensured) the well-being and opportunity for all of the stakeholders in the business they have built and are justifiably proud of.
In a nutshell, private equity funds enable business owners to partner with experts in surfacing and realizing business value, and working with management taking the business to “the next level” before it is sold to a strategic purchaser or larger financial investor.
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Paris Aden BA (Economics) CFA
Paris Aden is a Partner in Toronto and Montreal based Valitas Capital Partners. His investment banking experience includes working with clients at Morgan Stanley, Credit Suisse and RBC Capital Markets. He has direct investing experience with private equity firm Clairvest Group and co-founded Alluence Capital Advisors, a mid-market M&A advisory firm. Over the past 20 years Paris has been involved in over 100 M&A transactions with an aggregate value in excess of $80 billion.
Paris lectures at the Smith School of Business at Queen’s University in the Master of Finance (MFIN) program, and is an instructor and facilitator for Moody’s Analytics’ Advanced Capital Markets Program for capital markets professionals.
You can reach Paris at email@example.com, or by telephone at 416 556 0887.
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