Working The Private Equity Circuit

Are you a prime candidate for venture capital or other private investment backing? Here's how to get in the game.

companies that focus on serving fast-growing, underserved ethnic markets. “No private equity investor wants to be your partner forever. Each investment group has a defined life we’re willing to wait as long as four to seven years–but there has to be an exit strategy that will provide investors with their return.”

Although private equity investors are extremely profit-oriented, there are exceptions–especially local groups that have alternative goals. “We have $63 million in our fund, which we invest primarily to create jobs and stimulate economic growth,” says Kathryn Wylde, president and CEO of the New York City Investment Fund. “With our focus on New York, we believe a significant portion of our investments will go to minority entrepreneurs.” The fund’s backers, including some of the city’s leading companies and institutions, expect a return of principal after 15 years, but not necessarily any profits.

Even such civic-minded private equity investors insist on a clear exit strategy for the ventures they back. In general, there are several ways in which these investors can recover their money:

PUBLIC OFFERING. Some companies will grow to the point that shares can be sold to the public, often at a vast profit to investors. An IPO raises capital through federally registered and underwritten sales of the company’s shares. Venture capitalists who were in the right pl
ace at the right time have been known to post 100:1 returns within three years. (That’s certainly the exception and not the rule.) If your company goes public, you’ll likely hold on to a significant block of shares, perhaps enough for effective control, but you’ll be subject to numerous requirements for public disclosure of the company’s operations.

BUYOUT. A buy-sell agreement stipulates that any owner of a partnership or corporation must sell back shares at a predetermined price upon separation. Your company may be acquired by another company, public or private. “That’s what happened to my California TV operations,” says Douglas. “My backers told me it would be like selling my first child–and they were right.”

REFINANCING. If your company grows impressively, your level of cash flow and profitability may support a large bank loan. You might use the proceeds from this loan to buy out your private equity investors. This may truly be the win-win outcome: investors get their money and you get to keep ownership of your company.

LIQUIDATION. In essence, you sell the assets of the business and everyone divides the cash, pro rata. “The first private equity venture that I was involved with wound up with a sale,” says Ron Thompson, 49, now the chairman of Midwest Stamping & Manufacturing Co. in Bowling Green, Ohio. “The second time, though, it made more sense to just sell off the assets. The business had a great deal of retained earnings, which were distributed among all of the owners.”

Naturally, you can’t know when you launch a venture how it will end three, six or 12 years into the future. “Nevertheless,” says Christophe, “possible exit strategies should be discussed right from the beginning so you have an

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