Mark Hauser, co-managing partner of the private equity firm Hauser Private Equity, provides a deep dive into the ins and outs of a private equity transaction. According to Hauser, private equity is unique within the investment sector due to its strategy of creating funds through which investors can pool their resources and place their trust in the strategy of the partners at the private equity firm. The firms earn money through fees charged to investors in their private equity firms, both for managing the investments and based on their performance.
Private equity funds purchase entire companies rather than shares or any other type of partial ownership. Over half of investment deals in the private equity sector are within $50 million to $1 billion. They invest in companies that have an established business model that would benefit from an infusion of capital and operational support. Mark Hauser says that private equity firms will typically utilize a leveraged buyout strategy, borrowing funds to purchase a controlling share in a company.
There are three avenues through which private equity firms typically identify potential investment targets. A company may develop a strong enough reputation that the private equity firm becomes aware of them organically and contacts them to begin the conversation. If a company is represented by an investment bank they may reach out to the private equity firm on behalf of the company. There is also the option of word-of-mouth and other strategies developed by the firms for scouting.
After identifying a potential company to invest in, Hauser explains that a thorough due diligence process must then be executed by the private equity firm. The firm must both confirm that the information provided by the target company is accurate and explore the viability of its ability to generate effective returns. These factors are explored through commercial, financial and legal due diligence.
The commercial aspect involves utilizing analysts to examine the company’s prospects in terms of its commercial activity. They review a number of factors such as the current and projected industry landscape and historical financial performance of the business to determine its potential. Financial due diligence looks at determining the accuracy of the company’s presented information on its financials such as its cash flow and income amongst many others. Legal due diligence confirms that the private equity firm will not run into any unforeseen liabilities if it proceeds with the investment.
Assuming the due diligence process goes smoothly, Hauser says the next step is for the investment team leading the acquisition at the firm to present their findings to its investment committee. The i’s are dotted and t’s are crossed, and the purchase of the company is completed through the negotiation by both parties’ lawyers.
Once a part of the private equity fund’s portfolio of companies, the private equity firm will work with its leaders to facilitate growth and operational success. The firm will enter the deal with an exit strategy already in place, and after achieving its goals for the business will divest themselves, resulting in realized gains for the fund and its investors.