Why would a company sell to a private equity firm?
Private equity firms are investors who buy and sell companies, often with the goal of improving their performance and value. They usually have access to large amounts of capital, expertise, and networks that can help your business grow and achieve its potential.
They emphasize the ability of private equity firms to infuse capital into struggling companies, potentially saving them from bankruptcy and preserving jobs. These firms have the financial resources and strategic expertise to carry out changes needed by whoever owns them while streamlining operations and driving growth.
Successful private equity firms often will provide strategic and operational support following an acquisition that can help businesses with developing a detailed growth plan, process improvement, labor challenges and more.
The private equity industry has grown rapidly; it tends to be most popular when stock prices are high and interest rates low. An acquisition by private equity can make a company more competitive or saddle it with unsustainable debt, depending on the private equity firm's skills and objectives.
Operational improvements – PE firms can bring new systems, processes, and technologies to the privately owned business, which can improve efficiency, reduce costs, and increase profitability.
However, since private equity firms acquire companies with existing workers, they often do not create new jobs. Studies show that private equity takeovers typically result in job losses at companies they buy.
Private Equity Valuation Metrics
Equity valuation metrics must also be collected, including price-to-earnings, price-to-sales, price-to-book, and price-to-free cash flow. The EBITDA multiple can help in finding the target firm's enterprise value (EV)—which is why it's also called the enterprise value multiple.
The private equity owned company will have the same basic benefits of healthcare, life insurance, 401(k) and disability benefits as the public company, but often will not have all of the ancillary benefit programs. The larger the private equity owned company, the more likely they will have public company type benefits.
Enhance Your Financial Reports and Statements
At its core, a PE acquisition is a financial deal. PE groups expect to see aggressive growth and strong earnings, so they will want more data-driven insights on the business than you might have gathered as the sole owner.
Private equity investments are traditionally long-term investments with typical holding periods ranging between three and five years. Within this defined time period, the fund manager focuses on increasing the value of the portfolio company in order to sell it at a profit and distribute the proceeds to investors.
What are the cons of private equity?
What are the cons of private equity investing? Private equity investments are illiquid: Investor's funds are locked for a certain period. As such, investors in private equity must have a long-term investment horizon and be willing to hold their investments for a few years, if not more.
Private equity firms make money through carried interest, management fees, and dividend recaps. Carried interest: This is the profit paid to a fund's general partners (GPs).
Because private equity investments take a long-term approach to capitalising new businesses, developing innovative business models and restructuring distressed businesses, they tend not to have high correlations with public equity funds, making them a desirable diversifier in investment portfolios.
A PE partnership allows for a significant diversification of personal net worth, reducing exposure to economic shocks & business downturns. It facilitates a safer environment for owners to pursue growth-centric strategies, backed by PE firms' risk-managed and high-growth agendas.
Funds buy outstanding portions of private companies or struggling public companies by buying out shares and delisting. Once portfolio companies are purchased, PE firms work heavily with management to rework company operations to cut down on unnecessary costs and inefficient work-related matters.
| Position Title | Typical Age Range | Base Salary + Bonus (USD) |
|---|---|---|
| Senior Associate | 26-32 | $250-$400K |
| Vice President (VP) | 30-35 | $350-$500K |
| Director or Principal | 33-39 | $500-$800K |
| Managing Director (MD) or Partner | 36+ | $700-$2M |
Private-equity firms typically run leaner operations than banks and so have less need to cut jobs during slowdowns. But some have laid off about 5% to 15% of their staff, said Sasha Jensen, founder and chief executive of Jensen Partners, an executive-search firm for alternative-asset managers.
Working for a Private Equity-backed business can provide an enormous amount of financial reward if successful, and is the driving factor behind many executives' decision to pursue senior PE opportunities. Taking a senior position in a PE-owned company is a decision that should not be taken lightly, however.
What Happens When My Employer Sells My Place of Employment? When a business is sold, there is a technical termination of employment, even if you continue working the same job for the new employer. WARN does not count that technical termination as an employment loss if you keep your job.
Many private equity firms charge a two-and-twenty fee structure. Fund investors must therefore pay 2% per year of assets under management (AUM) plus 20% of returns generated above a certain threshold known as the hurdle rate.
What are the risks of private equity valuation?
Valuing private equity or venture capital investments poses challenges due to the lack of market pricing, limited financial transparency, and the subjective nature of valuation methods. Risks include inaccurate assumptions, changes in market conditions, and potential conflicts of interest among stakeholders.
Private equity produced average annual returns of 10.48% over the 20-year period ending on June 30, 2020. Between 2000 and 2020, private equity outperformed the Russell 2000, the S&P 500, and venture capital. When compared over other time frames, however, private equity returns can be less impressive.
The companies move fast, are dynamic and will test every skill the CFO possesses. Working in a private equity-backed company can be an exhilarating career experience. But to say it's not for everyone is an understatement.
Private equity funds are illiquid and are risky because of their high use of debt; furthermore, once investors have turned their money over to the fund, they have no say in how it's managed. In compensation for these terms, investors should expect a high rate of return.
Professional development: Private equity firms may bring in experienced professionals and resources to help improve the operations and efficiency of the company. Employees can benefit from exposure to new processes, best practices, and management strategies, enhancing their professional development.
