What to Look for in a Private Equity Firm

Although frequently portrayed in the media as irrational risk takers, the truth is that most people who decide to start their own small business are actually quite risk averse. Rather than spontaneously lunging at the latest fad, entrepreneurs have proven to be much more pragmatic, launching their company in response to what they see as a unique window of opportunity to exploit an unfulfilled need in the marketplace.

When individuals like this make the decision to seek out additional capital to fuel their expansion, they do so with the same measured consideration, research, and rigor used when starting their firm in the first place. This article is designed to fast-track those entrepreneurs who have weighed the pros and cons of various funding sources, and have decided to pursue private equity to help accelerate the growth of their company.

private equity
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Find Your Niche

The good news/bad news reality for entrepreneurs searching for firms specializing in private equity for small businesses is that, well, there just aren’t that many that truly fit the bill. While a cursory Google search will list pages of firms that bookend the investment space (focusing on either micro-funding fresh startup ventures OR injecting $20 – $100M into mid-market firms), there are very few that actually focus on this market niche to the exclusion of others.

Therefore, the first priority for identifying firms to provide strategic growth capital is to confirm that their focus is exclusively on a narrow market niche, such as venture capital or middle-market investments, as there are many subtle nuances and challenges unique to each space that require an experienced guide.

History Is Important

Once a short list of firms has been compiled, the next consideration is to evaluate results. Companies that remain in the private equity space year after year do so because they have figured out a formula that works.

While past performance does not guarantee future results, a thorough evaluation of the outcomes of the private equity investors’ portfolio of companies will provide a wealth of information regarding how successful their methodology is in impacting the bottom line growth of these firms.

Are people investing in them?

A third data point of research which can prove insightful is to determine if the private equity firm has received multiple tranches of outside investment themselves. Most companies in this space are themselves the recipient of external investment, which they in turn use to invest in promising growth companies. If they are successful and have a track record of proven results, this will usually be reflected in subsequent and increasing rounds of investment from wealthy pools of investors.

A quick scan of the “Press Releases” portion of their website will usually reveal a timeline for the completion of “Fund I” and “Fund II” etc., with each additional follow-on investment further validating the effectiveness of the team, the methodology, and the proprietary process they have in place.

Because timing – and particularly speed – is so critical when deciding to pursue external investment, a fourth important consideration for small business owners is to seek out private equity firms which are structured as a “committed fund.” A committed fund is simply a specific quantity of liquid capital that has been raised and secured, and is available for immediate investment. Because these funds are stockpiled in advance, this “dry powder” can be accessed for immediate deployment to pounce on fast-moving opportunities and seize first-mover advantage.

Listen To Your Heart

The final consideration, while esoteric, is no less important – trust your gut. Accepting outside private equity investments often involves conceding control of the company you’ve built from scratch, so it pays to trust your instincts in determining whether these are individuals you are comfortable working with, and who share a mutual respect and vision for the past, present, and future direction of your company.

About the Author: Doug Tatum is the chairman of Evolution Capital Partners, a private equity company that specializes in helping mid-size business get to the next level of growth. He is also Advisory Board Chairman for a national research institute funded by NASDQ on the exceptional growth patterns of middle market companies.