When it comes to private equity, misconceptions are abundant. Let’s set the record straight.
Private equity is a unique vehicle for financing. It’s designed for private companies who require additional growth capital.
Private-equity funds are run by professional advisors with operating experience. Capital is raised from limited partners, comprised of professional investors. Each fund has an individual set of investment criteria, known as an investment thesis.
The investment thesis formally explains what type of companies and situations the fund will invest in, including business sector and growth/maturity of the business. If you’re looking for private equity for your company, it’s important to work with a fund who thoroughly understands these aspects of your business. An investment thesis demonstrates discipline on the part of the fund manager; they are strategic rather than opportunistic.
Private equity is typically a good fit for companies under the following conditions:
- solid and consistent cash flow
- solid growth prospects
- capable and experienced management team
- limited customer concentration or other business risks
- willingness to sell or recapitalize the business in 5+/- years
Reality: Investors get involved in every sector of the economy—you just have to identify the right one. DCA Capital Partners is industry agnostic, meaning we invest in companies in a wide range of industries.
Reality: Some investors require control, others take only minority positions. DCA Capital provides funding for the purposes of:
- investing in strategic and operational growth or acquisitions (growth capital)
- partial liquidity to business owners interested in diversifying their risk or retiring balance sheet debt (recapitalization)
- providing buyout capital to replace existing business partners or shareholders seeking liquidity (partial buyout)
- acquiring a controlling interest in promising growth businesses (buyouts)
- assisting companies with strong fundamentals experiencing short-term balance sheet stress
Reality: Investors do not like to get involved in day-to-day operations unless management is experiencing problems. In those cases, an experienced advisor may step in to offer strategic insight.
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 acquirer (typically focused on continuity of cash flow; more risk averse)
- 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)
Reality: Returns are risk adjusted for the nature of capital provided (e.g., growth, buy-out, venture, distressed).