When Private Equity comes knocking

What is with all this private equity money??

The growth in the amount of money and companies controlled under the asset class of private equity (PE) has grown over the past two decades to levels the market vastly underestimated. In an article published by Deloitte Insights in November 2020, they predicted total to approach $5.8 trillion by 2025. For perspective, at the end of 2023, US public stocks were worth more than $50 trillion. ?$50 trillion is half of all public stock value in the world and 175% of the US GDP (which is disproportionally high compared to the rest of the world).?

While the value of publicly listed companies is extremely high, one can certainly argue this is skewed, in part by a subset of the stocks such as the “magnificent seven,” wherein some companies value exceeds $2 trillion each, which for some perspective is more than the GDP of all but 8 countries in the world. ?

However, as the public market capitalization value goes up, the number of companies publicly listed goes down materially. This is driven by at least three factors - public companies going private with PE money, private companies transitioning to PE investment rather than a public IPO in their more mature state, and mergers/acquisitions. ?If you hire an investment bank to find a buyer for your company, they will run an outreach process of which 10-20% are publicly listed companies, and the remainder are either PE firms of private companies already backed and invested by private equity firms.?

How do they find me??

The US is a bit less opaque with private companies as they are not required to file any open, public financial information as is the case in many other countries. Whereas a public company must disclose all its financial information, it also must detail executive compensation, bonus/stock rewards and material agreements. Additionally, public shareholders expect a transparent and open public disclosure of the quarterly results and at-minimum, insights into forward projections for the year ahead.?

PE firms pay internal staff and outside companies to collect intelligence on the millions of privately held companies that are difficult not only to find but properly size.?And as they drill down in market segments, such as healthcare and software, they will find larger private companies that show up in competition with publicly listed firms. This drives the curious to reach out and try to learn more about your company. ?

What should I be prepared to discuss??

On your initial discussion with the PE firm, you need not go into deep details about your company. ?How your products/services compete in the market, whether your business is profitable, a range of revenue expectation forecasts, and the number of employees and shareholders would be helpful. PE firms often have multiple funds they can invest in, and depending on your size, maturity, and business model, it may or may not be well-suited for their investment strategy. Of course, the role of the owners and leadership of the company following an investment is of utmost curiosity – would the founders and leadership be involved going forward, and financially linked to the forward success, or is this intended for succession??

And once you talk, what can come next??

If there is mutual interest in pursuing further discussions with the PE firm, an NDA (non-disclosure agreement) is prepared. ?In some cases, it is done before you have an initial chat. ?In this case, both sides agree that the information being shared is confidential and should remain that way solely between the two parties.?

The PE firm will have some deeper. slightly more probing financial questions on your business as well as a checklist of other questions so they can make a better assessment of value and attractiveness. In a future paper we will dig deeper into an initial due diligence process, an indication of interest on the part of the PE firm (either an Indication of Interest (IoI) or Letter of Interest (LoI) as the first phase of the courting process, and the heavier lift to the alter. ?

Summary?

If you have grown a successful privately owned firm, the odds of an outreach in email or phone to you around investments in your firm is highly likely. It is a matter of when, not if this will happen. The more the founders and leadership of your firm are prepared for this conversation, the more successful the future course of action may be. While you may not be interested in selling the company at this moment, you want to keep as many options open for the future. ?Perhaps 16 months down the line, you have decided that the best move is to buy your competitor and consolidate the market. Reviving that relationship with that PE firm may be the best path to making that happen. Understanding the PE firms given their longer-term increasing footprint in the economy is increasingly important. ?

By Brian E. Skiba, A Co-founder and senior partners at Vista Pura Partners.?

About the Author?

Brian Skiba is a co-founder and senior partner at Vista Pura Partners. He brings a unique blend of leadership, strategic, financial, and operational skills to bear. ?He has a mix of operational leadership roles (CEO, CFO, CTO, Board Member) and substantial investment banking experience (Partner, Managing Director) in Equity Research, Equity Strategy, M&A, and Capital Markets. ?Mr. Skiba has helped raise more than $6 billion for technology and healthcare companies and was instrumental in over 42 public market transactions (IPOs, secondary offerings) as well as billions of dollars in mergers and acquisitions. His career spanned the US and Europe at Cowen & Company, Lehman Brothers, Duetsche Bank and Arma Partners. He has extensive experience working across the table from private equity firms over his career. Brian holds an undergraduate degree in Business with focus on Quantitative Methods from Boston University, a master's in business administration (MBA) from the Amos Tuck School at Dartmouth College and has completed his work towards a master's in science in Software Engineering at Boston University.?

This article is the first in a series around the subject of engagement with a private equity firm from Vista Pura Partners.?

? 2024 – Vista Pura Partners, LLC?

About Vista Pura Partners

Vista Pura Partners is an advisory firm focused on helping privately held technology and healthcare companies manage their way through an investment or acquisition process with a private equity firm, which can be overwhelming in both depth and demand. Our team has helped companies through arduous processes, garnered high valuations and helped alleviate much of the financial and diligence work, allowing management to focus on their core responsibilities of running their businesses efficiently.

Our offices are in New York and Austin.