What does a partnership deal with private equity entail?

How does private equity work?

Private equity firms raise capital from their investors, which can include institutional investors such as banks, pension funds, insurance companies, and wealthy individuals. These funds are then invested in companies with a typical investment horizon of 3-7 years. The goal for PE firms is to multiply their investments, often aiming to achieve 3x the investment. After this period, the PE firm returns the money to its investors and generates revenue through management fees and carried interest (a share of the profit)

Partnership deals with private equity firms

When a private equity firm makes a deal with an entrepreneur, it typically involves buying between 40-80% of the company’s shares. Unlike strategic buyers (usually similar companies in the same industry) who often want to buy 90-100%, PE firms prefer to make a partnership deal with the current owners and management team. This means the entrepreneur can retain a significant ownership stake and continue leading the company. PE firms have a strong preference for the current management to stay and continue running the company, as their success depends on the company’s continued growth and development

Structure and capital investment

In a typical partnership deal, the PE firm buys existing shares (also called secondary, shares purchased from current owners) but can also invest new capital into the company. To increase returns, a certain amount of leverage is often used in the acquisition. This structure frees up capital for other growth initiatives and strengthens the company’s financial position

Strategic insights and networks

One of the biggest advantages of a partnership deal with a private equity firm is the strategic insight and network they offer. PE firms have extensive experience from previous investments and can provide valuable advice and strategies at the board level. They also have extensive networks that can help the company forge new partnerships and expand into new markets

Shared incentives and future growth

Partnership deals ensure that both the entrepreneur and the PE firm share the same incentives and are aligned in their goals. Since the PE firm often does not buy the entire company, there is a mutual interest in seeing the company grow and succeed. This common goal can drive success and create significant value for all parties involved

Realise value and secure the future

A partnership deal with a PE firm is often an excellent way for entrepreneurs to realise some of the value they have built in their company while bringing in a value-creating partner. By selling part of the company, the entrepreneur frees up capital and secures a financial gain, but still retains an ownership stake and remains part of the next phase of the company’s journey. This creates a significant upside if the company continues to perform well while reducing risk by securing a substantial amount of capital

Summary

Entering into a partnership deal with a private equity firm can be a wise strategy for entrepreneurs looking to realise value and secure future growth. PE firms offer not only capital but also strategic support and valuable networks that can help a company reach new heights. By structuring the deal in a way that benefits both parties, entrepreneurs can ensure they have a strong partner by their side to drive the company’s future success

Contact Merge today to discuss how we can help you explore the opportunity of entering into a partnership deal with a private equity firm and the benefits it can bring to your company