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here are more Private Equity Groups (PEGs) active in the market today than in past years. Depending on how you define and count these investors, there are now over 3,500 active professional participants of this type in the US. These groups primarily invest in the private middle market.
Most Private Equity Groups have preferences for investments in specific industries. This is their first screen to determine if they have any interest. The target industries for the more active PEGs are well known within the merger and acquisition community. Part of the service provided by top middle-market acquisition advisors is effective management support of their investments.
Private Equity Groups rarely want to invest in businesses that are losing money. They are not turnaround specialists. However, if you had a strong financial performance before a crisis and have found a cash flow break-even footing, they may talk to you. A formalized plan will be a big help in facilitating useful discussions. If you speak to someone in this funding group that does not have a good match for your needs, they still may be able to refer you to someone with the required investment profile.
These investment groups are sophisticated business buyers with billions of dollars. But they have a big problem—they have far more capital than workable deals. They cannot find enough companies that fit their acquisition criteria to effectively deploy all of their available capital in good times … let alone in a down economy.
The private investment groups’ problems are greatly increased in times of economic distress when few companies are developing any notable measure of financial performance.
They are frustrated and hungry, but they are disciplined. They normally have a strict minimum-size-company criterion for initial equity investments in a market segment. But they can be highly creative with preferred stock or convertible note investments in a highly disrupted market.
One standard investment approach utilized by PEGs is a corporate recapitalization. This is a popular technique when the owner wants to gain some liquidity, stay with their business, and benefit from the future growth of the company. In a distressed period, the approach permits the sale of a portion of the company at a price you might not accept in good times. But if it provides capital and a strong partner to help you manage through an uncertain future, a partial sale may make sense. It also will give you an opportunity to benefit if and when the company thrives in the future.
Some PEGs will do minority recaps. Some require control. Some will take equity directly and some will deploy a combination of convertible notes, preferred stock, and warrants. These terms are important but not as important as finding the right partner to help you manage your company. These professionals are also highly effective at arranging commercial financing once the company and the market reach a more “normal” position.
There is no easy way to make this critical decision.
Many owners hesitate and wait too long to move through all possible funding source discussions. In addition to the risks associated with such a delay, hesitation may inadvertently communicate a lack of confidence in the business. If necessary, engage an outside advisor who is familiar with the PEGs who are active in your industry to help with the process.
In summary, if you need a strong partner and a solid addition to your equity capital, you should consider this potential source of funds.