private equity

The 3 ingredients of a private equity investment decision

Angela Manning Finance , , ,
The 3 ingredients of a private equity investment decision

It’s a form of investment that is constantly grabbing the headlines and over recent times, really seems to have picked up the pace. However, if you were to question the Average Joe about the bread and butter of private equity investments, there’s every chance that you would be met with a blank look.

In short, this can be a complex type of financing and one that is difficult to get your head around. One element that is quite simple is the way in which investors approach it though. Whether it’s Marc Leder from Sun Capital, or a completely different investor from the other side of the world, most have very similar principles when it comes to private equity investments.

This is what we are going to be looking into today; as we scour through three of the key ingredients that form the typical private equity investment.

A good management team

One of the big misconceptions about private equity is that all groups are looking for an immediate change in management, as soon as their investment is finalized. Generally, this isn’t the case.

An investment team would much prefer to take control of a company which has an impressive management team. This is because the existing team already has inside-knowledge of the company; they know what is working well, and what is necessary for improvement.

If a company is forced to completely change the management, there are all sorts of issues to combat. They will firstly have to pay to replace the team, before then waiting for the new management to learn the internal processes of the company before they can implement any sort of change.

The potential for growth

This is related to both the market, and the company in question. One of the main requirements for a private equity company is the potential for high growth. Without this potential, their investment just isn’t going to work. Most approach companies with an exit strategy, which obviously will depend on a high rate of growth.

As such, they need to analyze firstly if the market has any potential for growth. From this point, they need to see if there is any space for this company to grow. In particularly small markets, this might not be possible, so a great deal of research will be placed into this area before the investment is made.

A good reputation

This is perhaps one of the more surprising elements of private equity, but one of the big things that investors look out for is a good reputation.

This is something that can only be harvested through time, which is one of the reasons why it’s regarded as being so important. A company can’t suddenly decide to buy an enhanced reputation; it’s something that can take years to build up.

As such, if there have been reputational problems in the past, this might mean that a private equity firm isn’t as interested in your company as you initially might have thought.

Private equity: The regular myths debunked

Angela Manning Business, Finance , , , ,
Private equity: The regular myths debunked

It’s painted in all sorts of lights, but few disagree that private equity is one of the most lucrative industries around. Succeed here – and the riches can be beyond your imagination.

Of course, this sort of reputation also leads to countless misconceptions. Every month we see masses of information published on private equity and unfortunately, a lot of it is inaccurate.

While we don’t have a dissertation-like word count to mull through all of the misinformation we have stumbled upon over recent times, we are going to discuss some of the most common myths that this industry throws at us.

Myth #1 – It’s all about the exit strategy

As you’ll see with a lot of the myths that we analyze, a lot may have “once” been true. In other words, they have become outdated, which is why they are now myths.

This first one about exit strategies most definitely fits this description. Nowadays, private equity firms don’t have one eye on the exit, many are about the long-term approach. Sure, most still sell within a set period of time (usually five to seven years), but it’s not a case of getting out and making a quick buck like it once was.

Myth #2 – Private equity firms just want to appoint their own team

This is one of the primary reasons why private equity has a bad name amongst some sources. A lot of people believe that they like to just step in, strip a team out, and implement their own people. Once upon a time this may have been the case but suffice to say, times have changed.

In fact, you only have to analyze the philosophy of Marc Leder from Sun Capital to see this. He has publically said that one of his primary questions when scrutinizing a company is to see if there is an existing management team he can take advantage of. In other words, if this doesn’t exist it’s a major turn-off, for the simple reason that there’s nobody who can aid him with the existing workings of the company.

Myth #3 – It’s all about the big money acquisitions

This final myth couldn’t be any further away from the truth. The reason a lot of people think along these lines is because all of the news headlines center on the big acquisitions – the ones worth tens of millions of dollars (or more).

What people don’t realize is that there’s a whole other private equity industry. There’s one that hones in on small to medium sized companies, and this is just as vibrant. Sure, it might not have the huge profits attached that some deals have, but it’s a business in its own right and some investors perform very well with this approach.

It could be said that this links in to the previous myth as well. As PE firms were so renowned to appointing their own team and “forgetting” about the existing structure, a lot of smaller businesses opposed the practice. Now this has changed somewhat, this part of the industry has opened up.