Types of Buyers: Private Equity Groups

Private Equity Groups (PEGS) are a common type of M&A buyer and possess a unique standing among business buyers. Private equity groups are unique in their investment strategies, in that their main interest lies within investing capital with the intention of acquiring a higher return in the future. The future for many PEGS can be as short as 18 months while others will buy and hold for years.  Private equity groups may be considered a sub-category of financial buyers. However, because the buyer typically conducts the deal through a portfolio company, a private equity group has a similar posture to that of a strategic buyer. A PEG’S main focus is generally platform companies having EBITDA of over $3,000,000 but PEGS has also been acquiring strategic add-ons or bolt-ons to platform companies already in their portfolios.  Add-ons do not necessarily have a minimum EBITDA to satisfy.

A private equity group is made up of a group of investors, often businesspeople who own a business or manage a fund and now have enough strategic capital to invest. Interestingly, PEGS are flush with capital due to economic factors that have many potential business sellers waiting at the sidelines for their companies to bounce back from the recession. The money at a private equity group can derive from a variety of limited partners, such as wealthy businesspeople, pension funds, lenders or capital from other companies. Private equity groups pool investor resources in order to fund acquisitions, typically focusing on underperforming companies or those with potential for abundant growth. While private equity groups often target healthcare and technology industries, they are known to invest in nearly any type of company that corresponds with their goals.

The private equity group’s general partners are those who run the general operations and collaborate with the seller to complete the M&A deals. The general partners are paid through a deal fee as well as a percentage of the acquired companies’ profits. PEGS have become so aggressive in hunting for deal flow that they often will hire recent business school graduates to contact M&A advisors for targets coming down the pipeline. One reason for this strategy is that they want to avoid an auction atmosphere if a deal comes to market that is an attractive company.

When selling a business to a private equity groups, the buyer has the advantage of possessing the financial backing to fund the deal and enough capital to put towards improving the net profit of the business. This does not mean that private equity groups hold an endless amount of principal to invest. Because private equity groups must answer to their limited partners, they must be careful not to overpay or become involved in a risky deal. General partners are cautious to only invest in promising deals and are well-versed in negotiating. It is important to navigate a deal with a private equity group prudently, as the firm’s desire to grow capital may lead to a lower-than-ideal selling price. On the other hand, if the private equity group believes that the seller’s business has a high amount of potential or as an add-on creates economies of scale, they may be willing to dole out a larger amount than what a financial or strategic buyer would typically pay or has the ability to fund.

Another advantage of selling a business to a private equity group is that many PEGs have management teams in place to facilitate the transfer of affairs post-closing. Private equity groups are well versed in the M&A process, so they may prove to be easier to work with than a first-time financial buyer. However, it is wise to employ the expertise of an advisor in order to prevent a private equity group from taking advantage of an inexperienced seller.  Many PEGS have highly sophisticated due diligence software that they use to test the viability of the acquisition and will sometimes try to negotiate a better price or terms during their no-shop period when they have exclusivity for a specified period of time to close the transaction. Often, a breakup fee clause may be inserted into the letter of intent of asset/stock purchase agreement to protect against these issues.

The best way to reach out to a PEG is through an experienced M&A advisor. An M&A advisor will assist the seller in narrowing down the choice of potential target PEGs to only the ones that are appropriate for the business. George & Company offers premium merger, acquisition, and divestiture services, so  do not hesitate to contact us in complete confidence.