Choosing a Right-Fit Private Equity Partner

Kelley Powell

Kelley W. Powell

Dec 10, 2020

Choosing a Right Fit Private Equity Partner
Photo Courtesy of KAYO Conference Series taken at KAYO Women Private Equity Summit, 2019 Boston

The following is adapted from Courage to Lose Sight of Shore.

Often I talk to founders who think it does not matter which private equity firm invests in them because money is money. That assumption could not be further from the truth.

Think about it this way. Dermatologists and surgeons are both doctors. But if you have a broken arm, you’re not going to visit the dermatologist.

There are different types of private equity partners, and you want the one who is the right fit for you and your company. This ensures that you can work together to grow your company, instead of becoming opposing forces.

In order to find a private equity partner aligned with your needs and goals, you must understand the different types of private equity investors, as well as what they can offer you beyond money.

Growth-Equity Investors

The first type of private equity investors are the growth-equity investors, who take minority positions in your company, with ownership stakes less than 50 percent.

Because growth-equity investors are minority owners, they cannot tell you, as a founder, what to do — they can only make suggestions. Sounds good in theory, but the devil is in the details of the letter of intent. Growth-equity investors often include language that gives them additional control if your business goes off track. So be careful.

Growth equity is the right choice when you want to put some money in your pocket, or when you require capital to grow the business. They are also the best bet if you, as the founder, still want to run the company. Also, because you will have majority ownership of your company, valuation is not as important.

Buyout Investors

Buyout investors take controlling interest in your business — owning more than 50 percent.

Buyout investors have control of your company from the outset of their investment. In the event of a disagreement over strategy or direction, they hold all of the cards. Buyout investors often do not let the founder run the company after their investment. Because of this, buyout investors are the preferred choice for founders who want to step away from the day-to-day running of the company.

Because you are selling more of your company, valuation is more critical. You want to make sure you’re getting the highest valuation you can. However, when done right, you can get two bites of the apple with buyout investors, making money off the initial valuation and again when the buyout investor sells the company.

It is important to note this second payout only happens if you put money back into the company. Be cautious and ask questions when making a decision to invest. Private equity firms usually set up deals to allow them to get their payouts first. In order for you to also get a payout, you must roll in a decent amount of your equity.

Leveraged-Buyout Groups

Leveraged-buyout groups use a combination of cash and debt to buy your company. (“Regular” buyout shops use debt as well, but debt is not a core part of their investment process.) Leveraged-buyout shops use higher ratios of debt, and they depend on the cash flow of the business to service that debt.

With this type of private equity investor, you will be giving up control. You will no longer be running the business, and if it goes sideways, the debt holders will take control of your company. You will want to take as much cash upfront as possible.

Beyond the Money: Advice and Introductions

Now that you have an idea of what kind of financial relationship you want to have with a firm, let’s consider the factors beyond money. The right-fit private equity partner should be able to help you grow by offering you solid business advice and providing valuable introductions.

The best investors focus on particular types of companies, and you will want to choose investors that have history in your specific industry. Founders of software companies should select investors that have experience owning software companies — ditto with healthcare businesses or manufacturing or consumer goods.

Avoid partnering with investors who are newbies to your business type. Why? Advice and introductions from newbies are not very useful to you as a founder.

Further, keep in mind that it is not just the deal partner who should have experience in your industry. Say, for example, the deal partner is the only software investor in the fund. That can become a problem, as the other partners may not understand your business.

Before choosing a private equity partner, you should talk to founders and CEOs of the firm’s other portfolio companies and ask whether that private equity group adds real value beyond money. Determine what strengths the private equity firm will bring to the table, and consider whether those skills align with the weak spots in your organization.

Choosing a Right-Fit Partner

To choose a right-fit private equity partner, you need to understand your needs and goals.

Think about what role you want to play in the company moving forward. Do you still want to be CEO? How much control are you willing to give up? How important is the initial payout to you? Answering those questions will help you choose what kind of private equity investor to partner with.

After identifying the type of investor, you want to look into what different firms can offer you in terms of advice and introductions. Remember, you are looking for alignment, not just money. Every firm will be offering you money, but not every firm will be able to offer you the same level of industry-specific guidance.

Once you know what is fundamentally important to you, you can better assess potential private equity partners to choose the one that is the right fit.

For more advice on choosing a right-fit private equity partner, you can find Courage to Lose Sight of Shore on Amazon.

Kelley W. Powell is CEO and partner of MacLaurin Group, a company providing technology operating partner services to portfolios of private equity companies. Supporting companies in growth and M&A activities, Kelley brings a unique experience from founder-led organization to multiple private equity-led cycles. Kelley is an avid mentor, angel investor, and chairwoman for the da Vinci Center for Innovation Angels Advisory Board at VCU. She’s also a board member of the Richmond chapter of the Association for Corporate Growth, and in 2020 was appointed by Governor Northam to serve as a member of the Virginia Council on Women.