Traditional PE Firms
Traditional private equity (PE) firms are the most common sources of equity investments (not from individuals). They may take a minority (<50%) or majority (
They raise funds and make investments from those funds
Funds are setup to last 10 years (often with optional extensions)
Firms typically hold their investments for a period of 5-7 years before exiting
Investors commit money to the fund with an expectation of a return on their capital over the life of the fund, which means…
The PE firm has to deploy all or nearly all of the raised capital during an investment period (normally within the first five years of the fund)
Each fund operates under a mandate or investment thesis that includes consideration of industry, size of business, financial metrics, etc.
Firms (especially the better ones) can bring new resources to the business that may not have been available prior to the investment (new management, if needed; support from other companies in the PE firm's portfolio; connections to other potential customers and vendors; access to and buying power with other businesses)
When making their investments, PE firms may do so entirely in cash or (especially for majority positions) a combination of cash and debt. See this brief post about how leverage (debt) is used with PE investments.
Before working with any PE fund, it is important to understand how they will fund their investment, what they will bring to the table, and how much and how long they intend to be directly involved in the business.
A small business investment company (SBIC) is licensed by the Small Business Administration (SBA) and provides both equity and debt financing. Many private equity and mezzanine funds are SBICs. When a fund is an SBIC, the SBA typically matches the investment amount at a rate of $1-$2 (in the form of a loan) for every $1 the investors put into the fund. SBICs often face certain constraints related to the types of investments they can make. Because of the associated fees and interest rate SBICs must pay to the SBA, their required returns on investments may be higher.
Family offices operate similarly to private equity firms (and debt funds) except for a few important distinctions:
A family office is not a fund comprised of multiple investors with committed capital
Family offices are typically setup from the wealth of a single family (hence the name)
They do not have the same pressure to deploy capital within a specific time frame, making them extremely patient when it comes to investing money
They also tend to hold onto their investments for longer periods
There are pros and cons to working with each type of equity investor. As such, it is important to understand the nuances involved with a potential investment. We at Fulham Partners are ready to guide business owners through this process.