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Is Private Equity an Answer to Cash Woes?

  • 15 March 2016
  • Author: Cari Holbrook
  • Number of views: 2907
Is Private Equity an Answer to Cash Woes?

Private equity is a term that’s thrown around the business world, especially among startup companies. It can be a great way for businesses to get a much-needed infusion of cash.  And you don’t need to be a young, hip startup to consider it as a viable option. Mature businesses can also receive private equity. In fact, private equity investors generally only invest in proven businesses with substantial earnings (even though the business may currently be in distress). But—beware—it’s not for everyone.

Firms that offer private equity invest directly in private companies with the intention to fund new technologies, expand working capital within an owned company, make acquisitions, or strengthen a balance sheet. Some points to consider, however:

  • These investments are typically reserved for companies on the verge of a large growth boom. You need to be able to demonstrate high upside potential for the next two to three years with substantially less downside risk than a typical venture-stage investment. Venture capital firms would be looking to make investments in companies that are growing at an annual rate at least 30 percent.
  • You may lose control of the business. “Most private equity investors are looking to make, at minimum, about two times their money and be in the deal for three to five years,” Daphne J. Dufresne, a managing director at RLJ Equity Partners, told The New York Times. “So if your plan was to pass your company down to your firstborn, then private equity is probably not a good fit.
  • Know the type of equity you’re seeking. There are several different investment structures included under the private equity umbrella including leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. A leveraged buyout transaction is the most typical and includes a private-equity firm buying majority control of an existing or mature firm.

Due to the current oil and gas slump, small energy companies are currently under pressure  to sell to private equity firms, who have raised billions of dollars to snap up bargains in this sector. If you’ve been approached by an investor or are considering the option for other reasons, please contact us to help with your strategy. With so many options available, it’s wise to carefully weigh what’s best for you and the business.

Image Copyright: livenart / 123RF Stock Photo

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