What Do Private Capital Investors Look for?

The private equity industry really got going in the 1970s when, Kohlberg Kravis & Roberts (“KKR”), one of the present day PE titans, was founded. The industry has flourished in goods times while being hit hard during the Great Recession. The fundamental framework though has always remained the same regardless of whether the economy was at the peak or trough of the business cycle. The criteria for evaluating investment opportunities are uniform globally.

The international criteria for what constitutes an attractive investment consist of solid industry characteristics, meaningful competitive differentiation, strong management with equity ownership, and business growth potential. PE fund investors look for a compelling reason to invest and love growth stories where the business owner is looking for capital to excel the current growth of their business.

Strong management with a meaningful equity stake in the business is a crucial criterion for investors. Often, if an existing owner is looking for a complete exit, this is a sign of worry for the investing party. PE funds like to create partnerships and can help owner managed or family businesses acquire ownership if they don’t have it initially. Funds can help take some cash off the table initially but with the continued presence of management and a capital injection from the investor, grow the equity stake remaining into a larger pie.

The alignment of growth plans between investors and business owners needs exist for the growth phase for the business to bear fruit. The due diligence process prior to investment from both parties ensures there is a strong alignment initially.

 Increasingly, entrepreneurs and business owners are competing on a global platform. Like companies, private equity funds are becoming more multinational. The Harvard Endowment invests capital in locally based Canadian private equity funds such as Torquest and Birch Hill Equity Partners. Private equity is an alternative asset class that allows institutional and high net worth investors exposure to a different risk-return scenario. Some mid-market and virtually all large cap funds are multi-national and as funds follow the attractive returns, increasingly they are moving to Asia.

Some PE funds are quite diverse in national or ethnic origin of personnel. You’ll be hard pressed to find many native New Yorkers working on Wall Street these days as Jacoline Loewen, author of Money Magnet can attest to. Broad similarities among private equity firms are evident around the world. The big differences lie in a firm’s strategy and culture and their ability to operate effectively internationally -- the litmus test for U.S. funds.