According to the 2012 Capital Overhang and Fund Cashflow Report published by Pitchbook (www.pitchbook.com), private equity funds collectively have $432 billion of “dry powder” available for investment. This represents a considerable amount of capital looking for a home, and fund managers are aggressively looking for potential investments. In many cases, the capital was raised several years ago, so the clock is ticking for many fund managers to put that money to work soon.
Many business owners and corporate executives overlook the opportunities presented by private equity financing. Others are apprehensive about approaching these groups based on the horror stories that sometimes emerge, which characterizes private equity firms as vultures and thieves. However, the reality is that most private equity firms make excellent business partners, if there is an alignment of interest with management.
While every private equity firm is unique, their basic formula is to find good business opportunities backed by a strong management team that will work to create an attractive exit strategy within a few years. Therefore, private equity firms tend to have a particular interest in opportunities such as:
- acquiring a business that can be an investment platform for growth;
- providing capital to fund strategic acquisitions;
- management buyouts;
- divisional spin-offs from larger companies; and
- recapitalizations, to allow existing owners to “take chips off the table”.
Private equity firms establish criteria for their investments, in terms of industry sector, company size, geographic locations, company life cycle, majority or minority interest and other parameters. This makes it easier to approach private equity firms that are more likely to have an interest in a particular opportunity. A listing and brief description of many private equity firms can be found on the Canadian Venture Capital and Private Equity Association’s website at www.cvca.ca.
While many private equity firms are seeking larger investments (e.g. companies valued in excess of $100 million), there is ample opportunity for smaller companies and divisional spin-offs as well. In particular, private equity firms that have a portfolio investment in a certain industry sector often look to acquire smaller businesses under that umbrella in pursuit of a roll-up strategy. This can be an intriguing opportunity for a seller, given the funds available from the private equity firm, combined with the potential synergies available through a merger with the existing portfolio investment.
The net result is that when undertaking an acquisition, divestiture or financing transaction, it’s usually worthwhile speaking with a few private equity firms to determine whether they would make a good partner.
Howard Johnson is a founder and Managing Director of VERACAP Corporate Finance, a leading Canadian private investment banking firm and one of Capital Alliance’s sister firms in M&A International.