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Corporate Finance
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Recapitalization
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Equity Financing
Private Equity
Private equity refers to any type of equity investment in which the security is not freely traded on a public or over-the-counter stock exchange. Private equity is generally illiquid (thought of as a long-term investment) and any investor wishing to sell such a security must find a buyer in the absence of an open, structured marketplace. Investors in private equity generally receive their return through one of three ways: going public, a sale or merger, or a recapitalization.
Private equity is normally used by companies to ”cash out” an existing owner, or to finance growth, management/leveraged buyouts, acquisitions, rollups, or turnaround transactions. Outlined below are four advantages owners should consider when seeking private equity.
- Substantial Liquidity – Private equity transactions are an excellent way for owners to obtain significant liquidity at an attractive valuation without having to transact an outright sale. Owners can “take some chips off the table” and diversify their net worth, while maintaining significant ongoing ownership, providing for new ownership opportunities for the next generation and still retain day-to-day operational control.
- Growth Capital – In addition to providing liquidity for selling shareholders, private equity firms will provide additional debt and equity capital for internal and external growth opportunities. In many businesses, the management team has excellent growth plans, but does not have the capital or is not willing to “bet the farm” to execute a given strategy.
- Obtain a Strong Partner with Aligned Goals – Private equity not only brings financial strength to help finance a business, but it also provides access to relationships and contacts that can help generate new customers, suppliers and business partners, as well as provide access to a broader supply of future capital. Private equity investors will typically participate in the business at the Board of Director level, with many possessing relevant operational expertise and extensive merger and acquisition experience. Furthermore, the goal of a private equity investor is to maximize the value of their investment in the company, which in-turn maximizes the management’s ownership interest in the company.
- “Second Bite of the Apple” – In a typical private equity transaction, the management team will still own a meaningful percentage of the business through a combination of retained ownership and new stock options granted by the private equity investor(s). Therefore, in three to seven years when the private equity investor seeks an exit from their investment, the management team can receive substantial additional value for the business. Since the initial private equity investment, the business will have hopefully grown and retired debt, resulting in a much more valuable business. In many cases, original management can receive more money from the “second bite of the apple” than the first.
Private equity can be sourced from family and friends, angel investors, or institutional investors such as venture capital, private equity firms or hedge funds. Typically, both angel investors and institutional investors look for a return on their investment of at least 30% - 40% with a clear exit strategy within three to seven years.
Private equity can be raised on its own or as part of a broader debt and equity package in the form of convertible preferred stock, preferred stock, or common stock.
How Atlantic American Can Help
Atlantic American advises our clients throughout the entire process of raising private equity including assistance with:
- Structuring the price and terms of the transaction
- Preparing the offering documents and business plan
- Contacting and marketing to private equity sponsors
- Raising the necessary financing
- Managing the investor presentations and due diligence process
- Negotiating the final terms and shareholder agreements
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