If you are like many business owners and management teams, you may reach a crossroads where taking on capital makes sense. Business owners and management teams chose private equity to address either a business or personal objective.
When early shareholders want to diversify
Many people think about private equity solely in terms of company financing, yet it can also enhance entrepreneurs' personal financial security. That's because founders and early shareholders often hold much of their personal wealth in the company. As a result, they are wealthy on paper but don't necessarily have a diversified personal balance sheet or ready cash for large, personal expenditures. An infusion of private equity can allow founders, owners and early investors to take some of the rewards off the table, while reducing their investment risk through diversification.
Providing liquidity for early shareholders can also help entrepreneurs meet related business objectives. For example, back in 1998, the management of Keystone RV Company, a manufacturer of recreation vehicles, were concerned that they were majority owned by a group of individual investors. The investors had provided cash at the company's start-up, but many of them wanted to exit their investment in Keystone and realize profits. At the same time, Keystone's CEO was looking for a way to provide ownership incentives to his team of key executives.
A private equity investment allowed Keystone to cash out early investors, while also establishing ownership stakes for the management team. By making managers shareholders and rewarding them for maximizing the company's value, Keystone was able to accelerate its growth rapidly after the investment. Keystone grew to become one of the leading companies in its industry and in 2001, the company was acquired by Thor Industries for more than $150 million.
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