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A relationship between an executive and a private equity group is likely to last for 5 years or more. The success of the relationship will be worth millions to both parties. It's therefore quite important to exercise care in selecting the right partner. For their part, PE groups are very diligent in checking out executives. Executives are often, not as careful.
There are several different circumstances in which an executive may need to choose a PE group. The most common are:
- You're selling all or part of your business to a PE group but will be staying involved.
- You're planning to buy a business and need additional equity financing
- You're being recruited by a PE firm to run a firm which they own.
The common factor is the need to better understand the compatibility of the PE fund with your plans and your management style. We can start with some pretty obvious selection criteria:
- Fund size. If the fund is too small, they won't have the capital to support your objectives. If the fund is too large, they won't be willing to commit the time to your deal. First determine how much additional equity capital will be needed for your plan, including add-on acquisitions. If the PE's total fund size is 8-12 times your equity requirement, there's a likely good fit.
- Geography. Some funds tend to invest in certain regions. You may not be interested in relocating. Make sure your geographic interests align.
- Vertical focus. Many funds focus on particular industries in which they have knowledge, expertise and networks. It's generally a good idea to work with an investor who understands the general space in which you'll be operating. Realistically, the fund may not have prior experience with every narrow vertical but look for similarity of experience. For example, you're planning to buy a wholesale distributor who sells to manufacturers. You may find PE funds with similar companies in other industries.
There are also a number of less obvious but equally important criteria to evaluate in considering a PE fund.
- Source of Funds. Most PE funds raise there money from pension and endowment funds, insurance companies and other capital rich institutions. They typically have a finite fund life and seek to return capital to the investors so that they will be able to raise more money. As a result, they will want to exit their investments within 5-7 years of getting in. This may not be a problem for you. But it's important to understand how your interests will align. If you are interested in a longer run, there are some PE funds whose capital comes from high net worth families. These funds are usually willing to stay in a business for a much longer period if it's generating good cash flows.
- Consolidation Strategy. PE firms differ to a remarkable degree in their approach to additional acquisitions for a platform company. Some view an acquisition strategy as a key component of a growth plan. Others want to focus to a much greater extent on organic growth. It's key to align with a fund that shares your perspective on this critical issue.
- Degree of Operational Involvement. How much help do you want? Every PE fund will sit on the board and have a healthy interest in results. They'll also participate heavily in your add-on acquisition activities. Beyond that, the level of involvement will differ. How often do they meet with their executives? What kinds of issues are discussed on a regular basis? Which decisions will they expect you to discuss before executing? It's important to have lots of conversations about these issues and also to check with their existing portfolio CEO's.
- Value Add. What capabilities and services does the fund have to support its portfolio companies? Some PE funds have successful operating executives who are available to consult with their CEO's. Others look for ways to leverage the buying power of their entire portfolio to acquire commercial services at attractive rates. These services can include everything from employee benefit plans to discounts on office supplies or shipping.
In addition to all of the factors described above, you'll want to give a lot of weight to chemistry. Mutual respect, compatible styles and the sense that you enjoy working together will go a long way when the inevitable bumps in the road occur. The firm's responsiveness and attentiveness to you during the process of getting to know each other is a very good indication.
Last but not least, is the fund prepared to reward you, the CEO adequately for achieving a great return for them? The single most important component of this is the opportunity to earn equity for achieving results.
There are several different circumstances in which an executive may need to choose a PE group. The most common are:
- You're selling all or part of your business to a PE group but will be staying involved.
- You're planning to buy a business and need additional equity financing
- You're being recruited by a PE firm to run a firm which they own.
The common factor is the need to better understand the compatibility of the PE fund with your plans and your management style. We can start with some pretty obvious selection criteria:
- Fund size. If the fund is too small, they won't have the capital to support your objectives. If the fund is too large, they won't be willing to commit the time to your deal. First determine how much additional equity capital will be needed for your plan, including add-on acquisitions. If the PE's total fund size is 8-12 times your equity requirement, there's a likely good fit.
- Geography. Some funds tend to invest in certain regions. You may not be interested in relocating. Make sure your geographic interests align.
- Vertical focus. Many funds focus on particular industries in which they have knowledge, expertise and networks. It's generally a good idea to work with an investor who understands the general space in which you'll be operating. Realistically, the fund may not have prior experience with every narrow vertical but look for similarity of experience. For example, you're planning to buy a wholesale distributor who sells to manufacturers. You may find PE funds with similar companies in other industries.
There are also a number of less obvious but equally important criteria to evaluate in considering a PE fund.
- Source of Funds. Most PE funds raise there money from pension and endowment funds, insurance companies and other capital rich institutions. They typically have a finite fund life and seek to return capital to the investors so that they will be able to raise more money. As a result, they will want to exit their investments within 5-7 years of getting in. This may not be a problem for you. But it's important to understand how your interests will align. If you are interested in a longer run, there are some PE funds whose capital comes from high net worth families. These funds are usually willing to stay in a business for a much longer period if it's generating good cash flows.
- Consolidation Strategy. PE firms differ to a remarkable degree in their approach to additional acquisitions for a platform company. Some view an acquisition strategy as a key component of a growth plan. Others want to focus to a much greater extent on organic growth. It's key to align with a fund that shares your perspective on this critical issue.
- Degree of Operational Involvement. How much help do you want? Every PE fund will sit on the board and have a healthy interest in results. They'll also participate heavily in your add-on acquisition activities. Beyond that, the level of involvement will differ. How often do they meet with their executives? What kinds of issues are discussed on a regular basis? Which decisions will they expect you to discuss before executing? It's important to have lots of conversations about these issues and also to check with their existing portfolio CEO's.
- Value Add. What capabilities and services does the fund have to support its portfolio companies? Some PE funds have successful operating executives who are available to consult with their CEO's. Others look for ways to leverage the buying power of their entire portfolio to acquire commercial services at attractive rates. These services can include everything from employee benefit plans to discounts on office supplies or shipping.
In addition to all of the factors described above, you'll want to give a lot of weight to chemistry. Mutual respect, compatible styles and the sense that you enjoy working together will go a long way when the inevitable bumps in the road occur. The firm's responsiveness and attentiveness to you during the process of getting to know each other is a very good indication.
Last but not least, is the fund prepared to reward you, the CEO adequately for achieving a great return for them? The single most important component of this is the opportunity to earn equity for achieving results.