Private equity transactions involve the flow of funds between private companies and private equity funds, which are established specifically to invest in shares of private companies. The funding generally comprises of equity capital at the earlier stages of investment, and may involve debt finance at the later stages of investment. The Venture Capital (VC) or Private Equity (PE) firms generally target companies with strong growth potential and a viable exit strategy through a trade sale of listing on a public exchange.
There are 4 main stages of private equity fund:
Stage 1: Raising Capital and Building the Team
It is an uphill battle for the investors to source capital. Private equity firms could possibly spend up to 2 years to create awareness and attract investors before finalizing their target capital provider. At the same time, the company must build a strong and capable investing team to manage the portfolio business. This is critical as it helps to build credibility and confidence for the funder to evaluate. Also, a team with strong dynamics and aptitude plays an important role in the fund’s success.
Stage 2: Sourcing Deal Flow
This stage requires a team with strong commitment, which is willing to entertain bankers, advisors and executives on odd occasions while raising the concept of private equity at the same time. This could take up to 5+ years for a slow fund.
Stage 3: Managing and Improving the Portfolio
Once the team has make a successful investment, it needs to start strategizing and devising plans to generate profitable performances so as to attract potential buyers to invest in the fund. The timing is considerably tight as some buyers evaluate medium-term performance when conducting their valuations.
Stage 4: Exiting the Investment
If there are right strategic buyers and optimistic economic conditions, an exit could occur within a short time period (approximately 6 months). However if the investment underperforms or the economic condition is in the slump, an exit might drag as long as 7+ years. There are three main options to consider if the investment period reaches 10 years. Firstly, it could be sold to a secondary fund. Secondly, the fund could be extended from 1 to 3+ years. Lastly, the firm could conduct a fire sale to sell the fund. The best exits are that potential buyers are willing to offer a price and not holding fire sales.