Boosting Your Career With Private-Equity Help

Executives in Fortune 1000 companies, as well as executives in transition, often are unaware that with the backing of a private-equity firm they have the potential to run their own business, and in so doing build considerable personal wealth.

Private-equity firms, in one form or another, have been around since the 19th century, before organized public stock markets existed. Since the early 1980s, they’ve become prominent once again, due to several factors. Consider the widespread corporate restructuring and the re-emergence of focused business strategies leading large corporations to sell their “nonstrategic” and undermanaged or undercapitalized businesses.

Further, the number of pension funds and the assets they control have been growing. They require substantial returns in their portfolios to meet long-term obligations. The mutual-fund industry has seen a parallel development. Additionally, methods to pool capital and separate ownership have gotten a boost from advances in technology. Don’t forget the human factor. Private-equity bank executives are now operating independently after numerous bank mergers and restructurings. Meanwhile, a generation of capable business managers who’ve been well educated in business schools and tempered in a competitive marketplace has emerged.

Hundreds of private-equity firms throughout the U.S. are purchasing portfolio companies with funds ranging from millions of dollars from institutional investors and high-net-worth individuals to billions of dollars, from large firms. Private-equity firm names, principal names with brief biographies, a listing of current portfolio companies and addresses and phone numbers can be found in sources such as “The Directory of Buyout Financing Sources” (Thompson Financial, 2002).

Almost as many investing styles, philosophies, strategies and approaches exist as there are private-equity firms. The best of these share a few key elements. The most successful specialize in areas where they have experience, have enjoyed success and see additional opportunity. One firm might specialize in telecommunications, information technology and business services. Another might focus on consumer products and pharmaceuticals. A third might focus exclusively on specialty manufacturers.

The second common element is setting specific size parameters. For example, some private-equity firms will focus on early-stage companies with annual revenues of less than $10 million. Others will only consider purchasing established companies with substantial track records and annual revenues of $50 million or greater. Still more only consider deals with a minimum investment of $100 million or more.

In addition to industry focus and size parameters, high-quality private-equity firms:

  • Concentrate on building strong management teams;
  • Are willing to back senior executives and their management teams with significant equity capital;
  • Call on a network of acquisition specialists such as lawyers, accountants, information-technology specialists and tax experts;
  • Have specific financial-return models;
  • Conduct extensive analysis and market research on specific companies and business categories; and
  • Approach a purchase with an exit strategy in mind.

So how can you take advantage of this? The key to success is capitalizing on the knowledge and experience you already have. First you need to determine your industry area of expertise, typically the fields where you’ve spent most of your career. The next step is to identify under-supported assets or “orphan” businesses within your company (or former company) or within industries where you have expertise and the parent company would be willing to sell that business at a mutually agreeable price. This asset may in fact be the business unit in which you are currently working.

To be persuasive to a private-equity firm you must be knowledgeable about the business and its value drivers, the team managing the business (or a team that could manage it), competition, segmentation, customer or consumer needs, technology requirements and capital-investment needs.

How do you prepare to approach a private-equity firm once you know its strategy matches your experience or area of expertise? To a large degree, in the same way you approach any potential new position. Once you make contact with a partner or managing director, you need a polished, current resume, which highlights your experience, particularly leadership roles and accomplishments. It also should showcase your exposure to acquisitions, such as planning, valuation, due diligence or post-acquisition integration. While acquisition experience isn’t a requirement, it’s helpful. Most important, you must have an attractive business opportunity or deal to propose.

Be prepared for a series of interviews that will focus on your background, strengths and weaknesses, knowledge of industry and players in the industry — and the business opportunity. To protect yourself, require the private-equity firm to sign a nondisclosure agreement with respect to your new business idea.

Being able to clearly and confidently discuss the business opportunity is essential to securing backing from a private-equity firm. Typically, you won’t be asked for a detailed business plan on the first meeting. However, it’s to your advantage to have one or be prepared to develop one with some help. The business plan would describe the opportunity, sources of future growth, competitive advantages and disadvantages, key focus and action areas, and realistic financial projections including an income statement, balance sheet, statement of cash flow and potential future buyers to help develop an exit strategy. Be prepared to discuss the management team you intend to put in place and the rationale for each member. Certainly, if you expect to be the chief executive officer, you’ll want to put together the best team possible to maximize your chances of success.

Most private-equity firms will require that the management team invest personal funds in at least the initial acquisition. Amounts depend on the philosophy of the firm and the size of the deal. But the amount will be only a small fraction of the total equity capital needed and is largely required to ascertain the management team’s commitment and confidence in the business plan. The private-equity firm is eager to put its investor capital to work, and the most successful deliver returns of more than 30% per year to their investors. Assuming the opportunity you’ve presented is sound, you might expect this sort of growth or more on your personal investment.

Can you pull this off? Absolutely yes, if you do your homework and bring a genuinely attractive opportunity to the investors. It’s been done thousands of times. You can do it again.

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