Welcome to the first episode of Talking Under Water: One water, one podcast. In this episode, your hosts...
Private equity is another method of raising capital for both growing and mature businesses. Different from “angel investors” or true “venture capitalists,” private equity investors are looking for mature and well-managed companies that are leaders in their defined markets and have a significant upside in their growth potential.
In addition to investing for growth, private equity firms will provide capital to support complete ownership “transitions.” This can include founders who are reaching retirement or families that have inherited businesses that they do not intend to operate. Private equity is also suited for owners who wish to lower their risk (i.e., “take some chips off the table”) or who recognize their need for assistance to take their business to the next level.
Wikipedia provides the following definition of private equity: “Private equity is a broad term that commonly refers to any type of equity investment in an asset in which the equity is not freely tradeable on a public stock market. More accurately, private equity refers to the manner in which the funds have been raised, namely on the private markets, as opposed to the public markets.”
There are many private equity firms in the marketplace. To take a closer look at the way they operate, let’s examine one specific example.
ONCAP is an example of a strong private equity fund. It was founded as an affiliate of a larger corporation, Onex Corp., in 1999. ONCAP currently manages a $575 million fund, dedicated to investing in and building value with small and mid-sized North American companies in partnership with their management teams. This follows a $400 million fund that has been invested.
Since its inception, ONCAP has acquired eight platform companies, completed 23 total acquisitions, and assisted the management teams of its companies in creating significant equity value in each realized investment. ONCAP was founded with capital commitments from ONEX and several of Canada’s largest pension funds and financial institutions.
Private equity funds have always followed an investment criterion. In this respect, ONCAP is an excellent example.
Gregory Baylin is a partner with ONCAP. He explained its investment criteria: “First of all, ONCAP invests in people and looks to partner with high quality managers. Second, we look for companies that have a track record of profitability and free cash flow for a reasonable period of time. Third, we typically look to invest between $20 million to $75 million in each opportunity that we consider.”
There are other requirements, but these three “gating items” (as they are referred to in the industry) are mandatory before there is reason to take a closer look at a specific opportunity.
Most private equity funds will look at deals in a wide range of industry sectors. Once they have completed a transaction in a specific sector, however, it often makes sense to build in the same sector, particularly when there is an opportunity for consolidation. Leveraging existing investments is a strong premise of private equity.
Regardless of industry focus, most private equity funds avoid early stage companies, real estate and operating turnaround situations, as evidenced by ONCAP’s basic gating items. Making good companies better through their involvement is a core private equity principal.
There are many advantages to accessing private equity rather than some other sources of capital available in the marketplace. First, private equity funds generally have some level of involvement in the businesses they invest in, and this can bring knowledge and experience these businesses may not have previously had. Second, private equity funds bring relationships that can offer business opportunities that would never have been realized without them.
The general attitude about private equity funds is that they bring more than capital to the table. In reality, they become partners with the ownership/management group. According to Baylin, “At ONCAP, we work closely with our management teams on issues related to acquisitions, financial structure and strategic planning. But it goes well beyond these things. At ONCAP, our shared ‘Onex value creation vision’ is enhanced by many intangibles. Partnering with a large private equity fund brings relationships and credibility that are unique and helpful for many independent businesses.”