Private Equity Groups (PEGS) and Private Investment Groups
Is a source of funding for a business from a privately or publicly held entity that specializes in investments in businesses. There are thousands of private equity firms in the marketplace with various investment preferences and acquisition criteria. Some private equity funds prefer early stage companies and some prefer more mature businesses. The private equity firms also have various industry targets that drive the investment appetite. As with other funding sources appetites can change as the market changes or the fund evolves through its normal lifecycle.
The Origin of a Private Equity Fund
The process that Private Equity Funds go through in starting a fund is carefully structured and begins with soliciting investment commitments from investors. This stage is typically called "fund raising." A Private Equity firm will begin by prospecting for investors with a target fund size. It will distribute a prospectus to potential investors and may take from several weeks to several months to raise the required capital. The prospectus will generally outline the type of industries the fund will target and basic investment criteria that will be applied in addition to the anticipated holding period. The fund will seek commitments of capital from institutional investors, endowments, foundations and individuals who seek to invest part of their portfolio in opportunities with a higher risk factor and commensurate opportunity for higher returns. Once the firm has raised enough commitments, it will start making investments in portfolio companies.
Length of Investment
Private Equity Groups help companies grow, but they will generally plan to exit the investment in three to seven years. An early stage investment make take seven to ten years to mature, while a later stage investment may only take a few years. By nature of the investment funds, it is important for the PEG to allow for a liquidation opportunity to the limited partners.
Private Equity Groups (PEGS) may be generalist or specialist investors depending on their investment strategy. PEGS that are generalists, invest in a variety of industry sectors, or geographic locations, at different stages of a company’s lifecycle. A PEG that specializes may seek investments in one or two specific industry sectors, or selected geographic areas.
A PEG may invest before there is a real product or company organized (so called "seed investing"), or may provide capital to start up a company in its first or second stages of development known as "early stage investing." Alternatively, a PEG may provide needed financing to help a company grow beyond a critical mass to become more successful ("expansion stage financing").
PEG’s may invest in a company throughout it’s life cycle providing funding to help the company grow to a critical mass to attract public financing through a stock offering or help the company attract a merger or acquisition with another company. This form of funding is referred to as later stage investing. At the other end of the spectrum, some PEGS specialize in the acquisition, turnaround or recapitalization of public and private companies.
PEGS in the Marketplace
Over the past twenty years, private equity activity has increased in the marketplace. Three factors seem to be driving record growth in private equity activity. First, the shares of many public companies have been relatively inexpensive compared to the value of their assets and revenue. Second, capital available to private equity firms has increased substantially as major investors such as pension funds, seeking higher investment returns allocate more of their portfolios to private equity. Third, until the current credit crunch began in mid-2007, the global market for the debt that is borrowed to help finance the acquisitions had been growing, permitting more borrowing at better rates.
The recent constriction of the global credit markets in the past year has reduced the number of private equity transactions, but industry leaders continue to believe that the private equity business model is not only sound, but powerful and resilient.
Interesting PEG Facts:
- Over the past five years, 2008 was the high point in PEG fund raising, where 189 funds were formed raising $312 billion.
- In the first quarter of 2010, $17 billion was raised by 20 funds.
- There are about 1,700 PEGS that have invested in about 34,000 portfolio companies.
- Fifty to sixty percent of the capital invested by PEGS since 2003 has been with portfolio companies were the deal size was under $50 million.
- The average EBITDA market multiple PEGS have paid since 2003 to the present, for all industries, ranged from 5.7 to 6.0.
- The size of a PEG investment can range from under $1 million to over $500 million. The typical investment ranges from $2 to $100 million.
- PEGS like to invest in mature businesses with a market niche and at least a 10% projected growth in revenue. Manufacturing, distribution and service businesses are common industries of interest, but not exclusively. Unlike Venture Capitalists (VC's), PEGS don't invest in early stage companies. Nor are they typically interested in retail, real estate, emerging technology or highly cyclical businesses.
The following are transaction structures that appeal to PEGS:
- 100% BUYOUT (e.g. seller is retiring)
- MAJORITY RECAPS (a second bite of the apple)
- MINORITY RECAPS (e.g. a dividend distribution)
- SPONSORING A MANAGEMENT BUY OUT
- SPONSORING A MANAGEMENT BUY IN
- PROVIDING GROWTH CAPITAL
PEGS Partnering With Individual Entrepreneurs
Many PEGS have a program whereby they partner with an individual entrepreneur, with the PEG contributing substantial amounts of the funds needed to acquire a business, and with the individual providing some of the acquisition funds, and with the intention of the individual investor also serving as the CEO of the acquired business when the PEG and the individual take over the target company.
ABMI has established relationships with many of the major PEGS in the USA and beyond. Not only are the PEGS prospective buyers of businesses ABMI lists and sells, but some of the PEGS are also prospective partners with individual buyers/investors that come to ABMI for assistance in finding a business to acquire.
And, some PEGS, which own businesses they've invested in previously, are also candidates to re-sell/divest of one or more of their acquired companies, from time to time, which ABMI could broker to our buyers.
ABMI, having helped thousands of business buyers and sellers successfully complete acquisition transactions over the last almost 30 years, of all types, all sizes and all prices, including Middle Market/Mergers & Acquisitions transactions, has a keen understanding of the PEG industry, and of how PEGS can be a valuable part of our activities.