hh…private equity. I call it “capital purgatory” since, in my experience working with capital raising clients, it’s easier to obtain private equity than venture capital but harder to obtain than an angel investment and therefore—-companies are in an unknown, in between stage between possibly getting enough capital to scale and grow their business and just enough investment from a wealth individual to continue bootstrapping their efforts for growth. Therefore, in my opinion, I secretly refer to private equity (PE) as “capital purgatory”.
As you probably know, private equity is a system by which a fund is managed by a general partner who use a variety of investment strategies (buy outs, mezzanine financing, venture capital, leverage buyouts (LBOs)) to invest in companies that in turn make money to pay out profits to limited partners, those being the investors into the fund. Generally the limited partners (LPs) like to see their investment return in 7-10 years. If you are a visual person like me, here is a handy chart for reference:
(Source: Wikipedia, last accessed 10/24/16)
Although I am but a humble lawyer, I will tell you the allure and fascination of analytical information for private equity astounds even my husband John Jackson, who is the numbers, analytical, “this is what this data means” person in our family. Data is vital to the world as we know it and particularly helpful in identifying trends, making investment decisions, and assessing any given situation. Consider these points about the U.S. private equity industry: (Credits: My favorite- Pitchbook, last accessed 10/24/16)
- 2016 may see the LEAST amount of PE investment since 2006, (2009 as the exception/outlier of course) with only 2,477 deals totaling only $484 Billion raised. (Source: Pitchbook, page 5)
- In 2016, buy-outs are down to the lowest since 2006 and platform creation is up. (Source: Id. at page 6)
- Company valuations are on the rise as 2016 saw valuations in multiples of 5 of EBITDA [Earning Before Interest, Taxes, Depreciation and Amortization] (Source: Id. at page 7)
- Median debt [of companies in PE portfolio] is down by almost 8 percentage points since 2010. (Source: Id.)
- Deals over $1B make up the majority of deals in 2016. (Source: Id. at page 9) That’s a lot of unicorns—thanks Uber and Airbnb
- IT (surprise, surprise) continued to obtain a majority of PE funds in 2016. (Source: Id.)
- The overall value of funds dropped in Q3 of 2016 despite having a robust Q2. (Source: Id. at page 14)
And on…and on…..there was much data to be digested in the 20 pages of data. But the point is the world of PE is a fascinating world that, in my opinion, is partially data driven (what industries are trending? what has been their performance record?) and partially human psychology (who will win the U.S. elections? what effect may that have on my investments? do I “like” this company?). By taking a look at the past trends and, to some extent, projections, you can make your own assessment as an investor or a company which direction you should go.
I am Dar’shun Kendrick, Private Securities Attorney and Owner of Kendrick Law Practice, helping businesses raise capital the LEGAL way. We work with “for profit” companies seeking to raise $250,000 or more through private capital (including crowdfunding) that have a line item budgeted for legal services. We do NOT find investors or introduce companies to investors; that is the job of “broker-dealers” and we are prohibited under federal securities law from doing so. I have 2 B.A.s from Oglethorpe University, a law degree from the University of Georgia and an M.B.A. from Kennesaw State University. View past and upcoming speaking engagements and request me to speak to your organization. I have been elected to the Georgia House of Representatives (East DeKalb/South Gwinnett) since 2011 and I serve on Juvenile Justice, Judiciary Non-Civil and as the ranking Democrat on the Small Business and Job Creation Committee.
You may be interested in my non-profit organization as well to EDUCATE and EMPOWER minorities: Minority Access to Capital, Inc.
We are ONLY authorized to practice law in Georgia and therefore any legal advice in this blog only pertains to Georgia based businesses. Please visit us online to sign up for a time to discuss services or for our 1 hour consultation.
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