How Private Equity Investors Work

Private Equity has a long track record of generating strong returns for its investors. It does this by acquiring companies and scaling them into more valuable enterprises. The scale up path takes several forms including acquisition growth, regional growth and distribution channel expansion. In all cases, private equity investors are looking to increase the growth rate of the company faster than its natural growth rate, thereby accruing value. Private equity investors have deep domain expertise in various industries and can see patterns across different verticals. Their ability to see a big picture and organize a business model around a growth premise, is what truly differentiates them in the marketplace. If a company has a project based revenue base, private equity will seek to add a service component to the business. If a company has a multi-level distribution model, private equity will seek to streamline it and go direct to customers. If a company sells exclusively via retail, they will add a web-based channel to its distribution.

These investors have both the ideas, capital and expertise to effect transformative change in a business model, overlaying value onto the aggregated set of assets. Once the transformative change path is set, these investors ensure the company has the people, process and systems needed to execute. The type of thought process and action has been institutionalized and perfected by these private equity firms, which allows them to replicate success across industries. And yet, this type of thought process and action is not proprietary or available only to Private equity firms. Any well-managed, well coached, company can achieve this same level of breakthrough as long as it commits to doing the hard work involved. It takes time and focus, and it is easy to let fall by the wayside. It is not easy for private business owners to think at big picture level as most are working in the trenches of their businesses. To think as a private equity investor, you need a bit of elevation and perspective to your view. When you have this, you see things differently and often more objectively.

Key steps to Private Equity Style Valuation

The key is selecting the right growth path and designing the tools to achieve it. Here are the Attract Capital top 4 steps to Private Equity-style valuation:

Join an independent CEO learning organization – Groups such as Gazelles, YPO, and Vistage are great at helping you learn higher level skills and also holding you accountable. Most CEOs benefit greatly from learning about others’ stories and best practices.
Build a System – Value accruing companies grow fast and need strong processes and systems to ensure things stay on track. Invest in scalable business systems and processes.
Cultivate a strong network of experts – There are a lot of people claiming to be experts. Like any normal distribution, only a few really are. Get to know the best people across disciplines and bring them in as part of your team to learn from.
Ensure capital availability – Part of the success formula to private equity is its ability to reliably fund all types of corporate growth. Make sure you always have different sources of capital to fund the specific growth path you’re taking.
Hire a Professional management team – Most companies are started by passionate entrepreneurs yet need a more measured, professional management approach at mid- cycle. Once you have a team running your company, you’ve institutionalized your expertise and are more likely to scale rapidly.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.