Private equity investment firms are significant players in company funding. Thomson Venture Economics and the National Venture Capital Association recently reported that in Q2 2004, 84 VC-backed companies were acquired by PEs. The transactional value of the 48 of companies that released that information totaled $4.5 billion. The total transaction value for Q2 2004 likely far exceeded $10 billion.

EXITING THROUGH PRIVATE EQUITY
Marilyn J. Holt, CMC, Holt CapitalMost seed and early-stage business plans end with one of two "when-I-grow-up statements": "Management plans an IPO in three to four years;" or "Management expects a buyout by one of several industry leaders in three to four years." For most experienced investors and their friends, the voice of skepticism yammers in their brain, while they try to compute the odds for that happening. While both alternative endgames are achieved each year by a many companies, there is a third path to the payday for founders and investors alike: acquisition by a private equity investment firm (PE). The term "private equity investment firm" confuses some because any equity capital not quoted on a stock market is private. However, this general term has come to be the moniker for holding companies. In the early 1980's, the term holding company became synonymous with over-bloated ambitions that destroyed many good companies, careers, and portfolios. Over a few years the name changed, but much of the core competencies stayed the same. PRIVATE EQUITY FIRMS OFFER WIDER HORIZONS

Private equity investment firms are significant players in company funding. Thomson Venture Economics and the National Venture Capital Association recently reported that in Q2 2004, 84 VC-backed companies were acquired by PEs. The transactional value of the 48 of companies that released that information totaled $4.5 billion. The total transaction value for Q2 2004 likely far exceeded $10 billion.

Four key hallmarks of PEs are:

invest in small to mid-market companies while demanding a growing revenue stream, at a variety of stages;

focus on the long-term; " managed for their investors much like a mutual fund, so dividends and cash flow are wanted;

buy their equity position from other shareholders, allowing founders and investors to "take some money off the table

Four key hallmarks of PEs are:

invest in small to mid-market companies while demanding a growing revenue stream, at a variety of stages;

focus on the long-term; " managed for their investors much like a mutual fund, so dividends and cash flow are wanted;

buy their equity position from other shareholders, allowing founders and investors to "take some money off the table

INVEST IN THE NEXT STAGE

I usually write about seed and early-stage companies, but if we all do our jobs, these companies grow and mature to the next stage. During the maturation process, the reality of the market place may have tempered the high-growth hockey stick plan, but there is a huge upside waiting to be harvested, and all the "corporatization" that goes along with maturity has to be achieved. Outside events or financial realities may make an IPO unattractive, and industry leaders may be lagging as you and companies like you erode their market share.

Private equity companies have a steady appetite for acquisition. VCs sell their holdings to the PEs on a regular basis, as do owners of other privately held companies. Among the PEs I have talked with over the past few years, they average about 30 investments a year. Like any industry, PEs fall along a bell curve: some boast 100 investments annually, and a few only do five or ten. The investment levels of PEs tend to clump into definable investment ranges along a bell curve continuum: some invest from $1,000,000 to $3,000,000, while others start investing at $100,000,000 and go up.

PEs buy ownership positions in high-growth and established companies that are still have room to grow. Significant revenues for the stage, as well as untapped markets to provide growth to the existing revenue stream are required. Most focus on small to mid-market companies. In this case "small" refers to companies with tens of millions in revenues, so shift your perspective to that level. Few have holdings of billion dollar companies, but they certainly would like to have them.

The age of the company is not an issue with PEs as it is with angel investors and VCs. PEs buy two and three year old companies and decades old companies. Some like high-tech, while others buy main street companies like service, restaurant, retail, insurance, heavy industry, trucking, and the like. Most PEs like to invest in companies which have strong established market positions and the potential to expand into new markets. Companies in overlooked or out-of-favor basic industries can find investors among PEs. Commonly, PEs leave the bleeding edge and disruptive technologies for the VCs. Like VCs, PEs look for companies with innovative products and services that have achieved or are likely to quickly achieve a critical level of commercial acceptance.

TAKE THE LONG VIEW

PEs tend to think of owning a company for several years. They tend to look for companies with long lifecycles that offset the cost of growth and other market variables. Nevertheless, they, too, are looking for a well-defined path to liquidity events or exits.

For founders and investors who want to support their senior executives in a management buyout, PEs regularly invest in management buyouts. A significant percentage of PEs will finance recapitalizations of closely held businesses in order to provide additional financing or liquidity for existing investors while allowing for continuing ownership. Some PE investments shade over into the VC region, by acquisition of or investment in companies that need significant capital to fund internal growth or make large acquisitions.

REWARD SUCCESS

One PE partner once told me that they were the later stage rocket fuel for growing companies. Another told me that IPO candidates need not apply: he only wanted companies that were willing to mature into their marketplace, presumably to many tens, if not hundreds of millions of dollars. This wide range of appetite provides an opportunity for many kinds of private companies.

The vast majority of companies with high-growth can achieve significant commercial acceptance and make lots of money. Many entrepreneurs lament that the VC demands of high-growth to get into the IPO line will force them into always losing money to grow. A major difference between PEs and VCs is that PEs can benefit from their investment all through the life of the investment through taking part of the cash flow or receiving dividends. VCs usually cannot benefit from the investment until they divest of all or part of the company. The reason why for this difference is buried in tax issues, company charters, and securities regulations.

GIVE THE LIQUIDITY EVENT

PEs buy some or all of the stock held by founders and investors, unlike venture capital firms (VCs) that invest for a percentage of the company, without any payment to founders and other shareholders. PEs expect that they will be providing a liquidity event for founders, investors, and other shareholders, and list this as one of the benefits for selling to them.

Depending on how the term sheet and subscription agreement is written, the purchase of shares in the company can be from all shareholders, should they choose to participate, or from one class of stock, such as preferred stock.

Every PE is different, and PEs may buy a minority share of the company all the way up to buying the entire company. How much they buy is based in part on market interest, but can also be governed by their own charters. Some are specifically chartered to by only minority number of shares and other are chartered to be the majority shareholders, only.

Often there is the assumption that the company will continue to move forward with the existing management team. PEs do not replace the management team, so if you want to keep working in your company, they want you. If you want to leave, a fully operating management team, with at least a few weeks of history, needs to be in place on the day of the transaction.

The Pacific Northwest has several well-regarded private equity investment firms. Around the country, there are many more that would like to have investments in our region. Putting your company in line for acquisition by one of these companies is both the challenge and the promise. If you can do that, there is a well-deserved payday in your future.