According to the Private Equity Growth Council, a Washington, D.C. research organization and resource center, in 2013 there were 2,797 private equity firms in the United States, a significant increase since 2000. The increase in private equity firms and funds is largely due to the bursting of the tech bubble in late 2000, the bursting of the housing and mortgage-backed security market in 2008 and the associated shift by individuals from the stock market into other forms of investment. In addition, the stock market run-up and the positive economic environment in the U.S. in the early 2000s led to a sizable increase in the ranks of high net worth individuals who qualified as accredited investors, although that number dropped during the latter part of the same decade.
Private equity firms and funds typically help companies make acquisitions, fund joint ventures, or otherwise fund expansion needs. Private equity firms enable business owners to pull cash out of the business to use for the following purposes: buy out a partner or partners; reinvest the proceeds into the business; or invest the proceeds into real estate or other investment vehicles to diversify the owner’s portfolio.
Private equity firms typically expect annual returns of 20 to 35% with an exit, usually through a sale to a strategic or financial buyer, within three to seven years. Some private equity firms will allow a recapitalization through debt leverage as an exit strategy), if the company has the strong cash flows to enable this. In this scenario, a recapitalization enables the company’s founder to buyout the private equity firm’s stake Other PE firms will allow the sale of the firm’s stake to a strategic investor or partner. Alternative exit strategies still must generate the 20 to 35% expected returns.
Some PE firms have lowered their expected annual returns for some industries for companies with certain characteristics to as low as 18% due to competition from venture capital funds and other private equity firms.
(Come back Friday to read more about PE firms and what their expectations are.)
Copyright © 2014 by Tiffany C. Wright. All of the above is a direct excerpt from the book, The Funding Is Out There! Access the Cash You Need to Impact Your Business. This book will be published by Morgan James Publishing and available on Amazon in August 2014 as the ebook version and in bookstores and libraries in October 2014 as the softcover version. All information is copyrighted. No part of this publication may be used without prior authorization from the author. For an advance copy in softcover format, please visit The Funding Is Out There!