Fall 2014 issue of Horizons

PRIVATE EQUITY

approach is being employed by PEGs that operate in the middle and lower-middle market. Most financial buyers have a well-defined strategy as to the type and size of businesses in which they invest, how they structure their deals, their investment time horizons and their management styles. A traditional PEG will have institutional investors that have provided capital to invest for a superior return (relative to other asset classes, such as publicly traded companies) over a stated period of time. Under the typical structure, a PEG will have five years to invest committed capital and five years to realize a return on that capital. Given the pressure to deliver return within a stated period of time, traditional PEGs will typically invest for a controlling interest in your business and seek to make significant cost and top-line changes, as well as management changes, before selling it to realize a return for their investors. Today’s PEGs can look very different than what is described above. This is particularly true in the middle and lower-middle market. The difference in approach is primarily driven by fund structure and a true desire to partner with management. Middle Market Private Equity Firms So how is the fund structure of many middle market PEGs different and why is that important? A significant number of PEGs in the middle market utilize a more patient capital approach. These PEGs can be patient because their fund structures allow them to do so. Oftentimes, the fund structure might have looser time frames, the composition of investors in the fund might be more friends, family and local investors as opposed to institutional investors, or the fund might not really be a fund at all. This type of patient capital can be more attractive to a business owner.

Their evaluation of your business will focus less on the strength of your business’ management team and “back-office” because these will often be eliminated during the post-transaction integration phase. Strategic buyers also tend to have more industry expertise and lower costs of equity capital than financial buyers, and they intend to own the acquired business indefinitely, thereby fully integrating the company into their existing business. As a result, strategic buyers may have the ability to pay more for your business than financial buyers. Financial Buyers Financial buyers are non-operating companies which can include private equity groups (PEGs), family investment offices and high net worth individuals, among others, which are in the business of making investments in companies and realizing a return on these investments. The goal of financial buyers is to identify businesses with attractive future growth opportunities and competitive advantages, invest capital, and realize a return on their investment with a sale or IPO. While there are many different types of financial buyers, this article will primarily focus on the differences with PEGs.

Private Equity Groups (PEGs) as Financial Buyers

The perception of most PEGs is that they are savvy financial engineers that invest in

a company, slash head count and costs, dramatically change the culture, and then flip the investment five years down the road to the highest bidder. While those types of PEGs still exist, a significantly different

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