Private Equity Group
Good news: They currently have billions of dollars to invest. They often provide capital for strategic growth. They typically buy 20% to 80% of a company’s stock. They invest when they feel a company’s management team can execute a business plan.
Bad news: They normally offer 4X-7X EBITDA. They often gain a controlling interest by contractual rights if they own less than a majority of the stock of the company. They typically want to earn from 25% to 40% on their investment into the seller’s business.
A Pre-Sale-Sale: PEGs do not typically buy 100% of your business. Instead, they buy a percentage of your business. They look at the money they put into your business as a short-term investment with the objective to sell 100% of your business to a third party within the next few years. They want a significant ROI.
A Form of a Financial Buyer: PEGs (Private Equity Groups) are financial buyers that tend to make direct investments in middle market companies and tend to pay four (4) to seven (7) times EBITDA for companies. They normally make control investments, however, many groups will take a minority position in the most promising deals. Private equity groups provide strategic capital for a number of activities, including recapitalizations, leverage buildups, management buyouts, and management buy-ins. PEGs are opportunistic investors and look at many deals before making an investment. Frequently, PEGs will create investment opportunities by sponsoring an executive team to target an industry in which the team has relevant experience and a strong track record. Many PEGs are comfortable investing in family businesses (Middle Market M&A, p. 13).
Possible Benefits of a PEG: Shareholders and partners may find a full or partial exit attractive for many reasons, including:
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- Diversifying away the risk of having too much personal net worth in a single asset.
- Minimizing the risk of growth by obtaining a financial or strategic partner.
- The company is expected to have a growth in value during the period of PEG ownership.
- Buying out passive partners and making room in the capital structure for management and employees without dilution to existing active shareholders (Middle Market M&A, p. 232).
Objectives and Characteristics of PEG Investments
PEG Goal
Earn 25% to 40% on their investment [a]
Multiple of EBITDA
PEGs typically pay between 4x-7x of EBITDA [b]
Holding Period
A finite holding period of between 3-5 years [b]
Control
The PEG will want a controlling interest in your company. They may gain this controlling interest by owning a majority of the company. They will obtain controlling interest by contractual rights if they own less than a majority of the stock of the company [c]
Minimum Size
PEGs (typically) look for companies with no less than $10 million in revenue and $1 million to $2 million in EBITDA [d]
Investment Percentage
PEGs will typically buy 20% to 80% of a business. Very few PEGs are interested in purchasing a minority position [d]
Management Team
Private equity professionals invest in a company when they are convinced the company’s management team can execute the business plan [a]
Pressure
PEGs face intense pressure to invest their capital at high rates of return, or they will be put out of business [e]
Staff Size
PEGs generally have small staffs, usually between 10-15. The largest PEG in the world might have 40-50 people [e]
Industry Expertise
Many PEGs specialize in investing in particular industries [e]
Turnarounds
Some PEGs, but only a few, focus on turnarounds [e]
[a] Private Capital Markets, Second Edition, p. 366.
[b] Middle Market M&A, p. 13; p. 232.
[c] Private Capital Markets, Second Edition, p. 366. Middle Market M&A, p. 231.
[d] Cash Out-Move On, p. 139 – 140.
[e] Sell Your Business Your Way, p. 130-132.