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Private Equity: Myths & Realities

When it comes to private equity, misconceptions are abundant. Let’s set the record straight.

Private equity is a unique but long-established vehicle for financing. It’s designed for private companies who require additional growth capital.

Private equity funds are run by professional investment managers (PE Investors) with relevant operating experience and expertise in helping companies grow. Capital is raised professional investors, typically referred to as limited partners. Each fund has an individual set of investment criteria, known as an investment mandate.

The investment mandate describes what type of companies and situations the fund will invest in, including industry and situations. If you’re looking for private equity for your company, it’s important to work with a PE Investor who thoroughly understands your business and has a track record in the area your company operates. An investment mandate demonstrates discipline on the part of the PE Investor; they are strategic rather than opportunistic.

Private equity is typically a good fit for companies under the following conditions:

  • profitable and positive cash flows;
  • growth prospects;
  • capable and experienced management team;
  • limited customer concentration or other significant business risks;
  • willingness to seek new shareholders to continue the growth of the business.

To further your understanding of Private Equity we would like to dispel some of the myths associated with this type of investment:

Myth: Investors only like technology, biotech, and clean energy companies

Reality: Investors get involved in every sector of the economy—you just have to identify the right one. Most local PE Investors are industry agnostic, meaning they invest in companies in a wide range of industries.

Myth: Investors want to own the majority position in my business

Reality: Some investors require control; others take only minority positions.

Most New Zealand private capital firms provide funding for the purposes of:

  • funding strategic (e.g. an acquisition) and operational growth initiatives (e.g. entering a new market);
  • providing partial liquidity to business owners interested in diversifying their risk or retiring balance sheet debt; 
  • providing buyout capital to replace existing business partners or shareholders seeking liquidity (succession); 
  • assisting companies with strong fundamentals experiencing short-term balance sheet stress.

Myth: Investors want to control my business

Reality: PE Investors do not like to get involved in day-to-day operations unless management are experiencing problems and seek their input. In some cases, an experienced advisor may step in to offer strategic insight.

Myth: Investors will force me to sell the business in five years

Reality: Investors require liquidity, but there are multiple ways to achieve it other than a sale of the business. It’s important to begin the process with the end in mind. Options include:

  • sale to a strategic acquirer (someone who can use your company to expand their existing business);
  • sale to a financial sponsor (for example, a different PE investor);
  • redemption by the company (buy out the existing shareholders or investors over a period of time using existing funds from the operation or borrowing funds);
  • initial public offering (less common for smaller companies).
  • remember creating a larger more profitable company increases the wealth of all shareholders.

Myth: Private equity firms expect unrealistic returns on their investments

Reality: Returns are risk adjusted for the nature of capital provided (e.g. growth, buy-out, venture, distressed).

Adapted from an article by DCA Partners, Roseville, CA

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