What is Private Equity (PE)?
Private equity is a phrase for investment shares representing an ownership interest in a private business that is not publicly traded. This organized capital fund made up of large institutional investors, such as pension funds, endowments/foundations, the high net worth, and insurance companies, etc.
If you think about the stages of capital (money) available to a tech company, PE typically comes after venture capital (VC) and before public offering (IPO) in the progression of things.
This private equity aka is for companies that are maturing in the business sense but still have good prospects ahead and value to offer new shareholders. While PE is still considered ‘risk capital’ from the investors/fund perspective, much of the risk has been removed by the time PE money arrives. It’s usually deployed starting around $50m+ and for majority control / 100% ownership stake in the otherwise closely held private investee.
This investment class represents some seriously big money: one research firm estimates that the average PE fund size is $1.3 billion and the total raised in just 2017 topped half a 500 billion dollars in aggregate. That’s not counting the trillions of dollars already under management that’s built up and invested from years before waiting for liquidity + return.
Private Equity firms tend operate on a mentality of all-in since they’re much more involved with companies’ operations than the VCs are, usually calling the shots at this point with total control, experience, and economy of scale across a portfolio of companies. And because the companies that PE invests in are private, the investing firms and their fund managers still seek an exit event such as IPO or merger/acquisition event to return their capital…and then some.
Why is it important to know what Minnesota tech companies are backed by private equity?
These companies are generally at a certain stage in their lifecycle where they are established in their domain and revenue streams. They’re not huge yet, but not small by any means, and their PE partners are seeking to both bolster the appeal and an exit and return on their investment (ROI) within the next 5-10 years. That means another phase of value creation is imminent. That value could be derived organically, complimentary via acquisition, by the refinement of operations, and/or combination thereof. It’s all about setting the company up for the next set of owners — which ideally is the public by initial stock offering (IPO).
We’ve seen a number of PE-backed Minnesota companies make a lot of buys over the years.
The goal of ROI is explicit and the stakes are raised, nothing matters more to private equity funds than maximizing their return by any means necessary. But there’s only two ways that positive liquidity happens: via IPO or being swallowed up by a bigger fish. So the marketplace expectations are there, the employment is generally up, the bank account often is refilled, the management/operations is on a new level, and there’s coordination + cross-selling between peer portfolio companies. The system becomes optimized and ready for resale (ideally).