Understanding private equity

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[ ABOVE: Matt Dunbar (standing) moderates a discussion with Mark Smith (left) and Ben Wallace (center). ]
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Matt Dunbar is managing director of the Upstate Carolina Angel Network (UCAN), co-founder of the South Carolina Angel Network and a board member of the national Angel Capital Association and Entegra Bank. Prior to leading UCAN, Matt was a strategic management consultant with The Boston Consulting Group and a manufacturing and plastics engineer with Eastman Chemical Company.

Mark Smith is CEO of Innegra Technologies, an advanced materials company in Greenville. Previously, Mark has been chairman, CEO and CFO with several growth companies across the U.S. and has strong experience working with private equity investments on the client side.

Ben Wallace is a partner with Azalea Capital, a private equity firm based in Greenville that invests in lower middle-market companies. Before joining Azalea Capital in 2007, Ben worked as a product manager and business analyst for ScanSource Inc., an international distributor of technology products headquartered in Greenville.

 

Private equity defined

 

When considering all forms of investment capital available for growth businesses at various stages of development, private equity (PE) is designed for companies at more mature stages of growth as compared to angel and venture capital funds, which are earlier stage capital. PE is typically used to accelerate growth in a profitable business, turn around a struggling company or to affect a liquidity event such as an initial public offering (IPO) or a sale to a larger company.

In alignment with this purpose, PE firms typically target companies with annual revenues of $10 million or more. Most firms narrow their focus further by investing in particular industries and often within certain geographies.

 

What do PE investors look for?

 

Assuming a company has reached the appropriate size for PE investment, the other key criteria considered by the investment managers are:

1: Identification of a future liquidating event,

2: A strong, established leadership team running the business, and

3: Achievement of key growth milestones.

 

It is also important that PE investors believe they can bring additional value to the business beyond just the capital infusion, such as industry expertise and strategic relationships.

Matt Dunbar moderating the NEXT Capital Series discussion.
Matt Dunbar moderating the NEXT Capital Series discussion.

Working with PE

 

Companies who successfully attract PE investment should expect an active, engaged partnership going forward as the investor looks to leverage its business connections and past experiences to help the company achieve its objectives and the future liquidity event targeted. There is also, typically, a strong push in the first 100 days following a PE deal to implement the growth plan agreed on during the investment negotiation, and thus the company must be ready on Day One to shift into a new action plan with its PE partner.

Start early

 

To attract PE funding, a CEO must work ahead of the funding need to get their company prepared for due diligence with potential investors. PE investors will expect the leadership team to know their company upside down and backwards and to be very knowledgeable of industry trends. Later in the process is no time to have surprises for the investors nor to stumble around for critical business information.

Do your own due diligence

 

Though the initial research into PE may require the company to cast a broad net to identify potential investors, the CEO should research and evaluate future partners just as exhaustively as they will review the company. This relationship will be like a marriage within the business and thus it is critical to get to know the strengths and weaknesses of the potential partner well before the deal closes.

Team of advisors

 

Perhaps the most important thing a CEO can do when evaluating a potential PE investment is to surround themselves with a group of trusted advisors who can provide expert counsel from an unbiased view. This team should include both professional advisors such as attorneys and accountants who have worked with private equity funded companies before and business leaders who have successfully attracted and exited PE ventures previously.

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