Private equity is a high-stakes form of investing, with over 50 percent of deals in the sector sitting between $50 million and $1 billion. This is a breakdown of private equity investing according to Mark Hauser, the founder and a co-managing partner at Hauser Private Equity.
A private equity firm will most often target a company that has already has a proven business model, and through its investment would be able to experience rapid expansion. The firm will most often accomplish this through a leveraged buyout, using borrowed funds to purchase a controlling share of the business at a minimum, but more often than not will acquire the entire company outright. The main goal of a private equity investment is to help it achieve a new level of growth, creating strong returns for investors in the private equity fund.
Mark Hauser says a private equity firm discovers its target companies through the business itself, investment bank recommendations, or through its own developed networks and proprietary methods of identification. Once a business has been tagged for further exploration, the private equity firm will exercise due diligence to meticulously analyze the potential of the company as an investment. This process involves utilizing resources such as analysts, consultants and lawyers to examine the commercial, financial, and legal implications of an acquisition.
Commercial due diligence sees the business assessed by analysts to determine its potential for the future through its historical commercial activity. Financial due diligence looks at the company’s provided financials and thoroughly audits the business’ records to determine whether the information given is accurate. Legal due diligence looks for any potential liabilities that may prove to be detrimental to the acquisition and future of the company.
Barring any red flags discovered in the due diligence process, the investment will proceed to the final stages in which a deal is brokered between both parties’ lawyers and finalized with the release of funds and transfer of company equity, says Mark Hauser. Post-finalization, the business is now a part of a private equity fund’s portfolio of companies and the firm facilitates growth through operational support. Rather than running the numerous businesses under its umbrella, a private equity investment provides the capital needed for a company to propel forward to the next level.
Mark indicates that no private equity investment is intended to be indefinite, and a typical scenario involves a successful exit after a period of roughly five years, give or take. Sometimes this exit comes as a result of an initial public offering, but more often than not the partnership is concluded through the acquisition of the business by another company that is ready to help it in its next phase.