Advantages and Disadvantages of U.S. Private Capital

I try to warn business owners that U.S. PE funds have a huge range of personalities. Some are unpleasant, such as vulture funds. The onus for due diligence lies with the business owner and it’s very important to do due diligence on the PE funds. “You are in a marriage where you cannot get divorced,” I like to say to business owners. The success of the relationship is determined by the personality and chemistry of the fund. Different styles of investing can lead to a deterioration of the relationship which can throw off the dynamics of the partnership and attaining growth may become hard pressed.

U.S. firms can provide American-specific expertise, in terms of market knowledge, networks, banking relationships and exit alternatives.

PE funds can also provide value through effective board members, helping make complex decisions and providing expertise on M&A. Upon exit, the PE fund can help pull valuation up by effectively positioning the company to sell to a bigger universe of funds.

The litmus test is the composition of the firm’s professional staff and track record with other management teams. I encourage CEOs to contact the CEOs of previous and current investments of the potential fund investor. Communicating CEO to CEO, there will be “no surprise in the end zone”. As a business owner, you will gain a better understanding of how the fund works -- if they are crowding on day-to-day operations or if there’s a previous onerous relationship.

This is the ultimate litmus test for business owners, contacting the entire list of CEOs that a fund has worked with. Business owners need to know how the fund they’ve partnered with will react when the going gets tough – this is when the fund shows their metal!