Private Equity Investing - What It Is and How We Do It


The 'deal' lies at the heart of what we call private equity. Defining the private equity transaction needn't be complicated or weighed down by jargon. Unlike other corners of finance, the reliant structure of an equity investment relies more on 'shoe leather' rather than algorithms or other forms of wizardry present within the industry. It's a euphemism for essentially living out of a suitcase until all the i's are dotted and t's crossed; that is to say whenever the deal has been finalized.

What is Private Equity Investing?

Perhaps the most fascinating aspect of private equity investing is that the modus operandi applies equally to an aerospace manufacturer as it does to a residential service provider. In short, private equity merges the interests of business managers and funding partners. When a business reaches a point in its lifecycle where further avenues toward growth are unclear, a private equity partner steps forward, offering expertise and resources - monetary and beyond - that secure future expansion.

What Are Private Equity Investor Target Company Characteristics

An equity firm, through a fund, acquires an ownership percentage of the target business by way of a buyout. Equity investors have a fondness for large and mature companies sporting stable and positive cash flow with needed operational improvements. Though these companies may be highly developed and enjoy a sizable market share, they could be undervalued or suffer from internal efficiencies. During the long holding period, operational improvements drive value creation leading to higher multiples. 

How Can Private Equity Improve a Business

Once the firm acquires control of a company, making operative and sustainable upgrades becomes paramount. This could mean filling out or reorganizing the management team; augmenting marketing functions to include new sales channels and executing a strategic acquisition plan. Qualitative assessments completed by the equity firm can highlight strengths and weaknesses in the organizational structure, corporate governance, and functional output.

What is the Private Equity Investment Approach?

The running common thread between private equity investment strategies is the diversification of risk. Fund managers want to spread the risk across a portfolio of companies because it reduces heightened exposure to any specific risk set. Some firms enlist the funds of funds approach while others invest directly into the companies themselves. 

What is the Private Equity Fund Manager's Role?

Private portfolio management is by definition much different than say, managing a portfolio of stocks. Equity managers get involved in the day-to-day operations. Many take seats on director boards, vote on key issues in management, review budgets, and generally bring value-add skill sets to the table that the company owners may not possess. 

What Factors Affect Private Equity Business Valuations?

A multiple of the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is the most common way of evaluating an enterprise. This earnings multiple is what an investor will ultimately pay for ownership of the business. 

What dictates this multiple? The answer begins with another round of questions actually:

  • what is the company's market?
  • is the market contracting, growing, maturing, or cyclical?
  • what is the market position?
  • what is the defensive strategy?
  • how quick is a sale converted into cash?
  • what is the state of cash flow management?
A company with a diversified customer base and a healthy layer of non-owner management will command higher multiples than a company where the owner wears too many hats or a company in a shrinking market. Of course, this is just a means to an end and not the end itself. Business evaluation requires a great deal of due diligence to establish the level of operational risk. 

How We Do Private Equity Differently

The value-add proposition underscores the relationship between fund and business managers. Typically, a firm acquires a controlling stake, increases the enterprise value, and sells its position later down the line. We buy with no intentions of selling. Everything we do is for the long term. Investing with 30-year committed funds is a testament to our time-tested, unique fund structure.