Types of Private Equity Deals Investment Club

Posted: 23 Nov 2019 03:26 AM PST

Private Equity deals can of course come in all shapes and sizes. The investments can range in terms of size and each individual investment is distinct.

However, there are some similarities in terms of the age of the target business and what private equity firms hope to achieve at each stage. So today we'll be looking at these different deal types in more detail - let's get started...

So generally, in terms of the life-cycle of a business, we have three segments: Startup (Early Stage) Growth (Mid Stage) Mature (Late Stage)

For the Startup phase, you have the Seed Capital (which is usually from angel investors) and the Venture Capital (VC) deals. Now I won't focus too much on this stage as the Private Equity firms don't usually enter the picture until the next stage, but generally this early stage is about user growth, revenue growth and demonstrating the potential for profitability (or ideally achieving it). Investments in this category can range between $100K all the way up to $25mm for Venture Capital rounds.

The Private Equity firms start to get involved in the Growth phase. Let's take a look:

a) Growth Equity Deal: capital to help a young, profitable business grow faster. The private equity firm will invest between $10-$100mm (usually with no leverage) for a minority stake (so around 10-30%) in the business - the emphasis for the Growth Equity Deals is expanding the profit margin and exit multiple expansion (the exit multiple is a key metric for private equity companies, and it basically means the amount they sell the company for at a later date compared to a metric such as EBITDA, Earnings Before Interest, Tax, Depreciation and Amortisation)

b) Then we have Growth Buyouts; now this is the same as Growth Equity, but it is a majority stake (hence the name buyout) whereas the growth equity is a minority stake. The investment will range from around $20-200mm and the leverage is 0-50%. Now the emphasis is similar to the Growth equity phase, but the main different is LEVERAGE IS USED and this can lead to higher returns.

Let's move onto the last category - Mature (Late Stage)

a) First off, we have Private Investment in Public Equity (PIPE), which involves the purchase of fairly large (5-20%) stake in the stock of a public company. The investment will probably range somewhere between $25-500mm (with no leverage) and the idea here is that the cash from the Private Equity firm will be used to increase the stock price of the public company.

b) We have a carve-out/ Divestiture, which involves a buying a (non-core) part of a large company (hence the name carve-out, you carve out a piece). The investment could range from $25mm-$5bn (with higher leverage 50-80%), and the emphasis is improving operations. The idea is to use company's cash flow to pay down the debt; we've seen how this can impact returns. To simplify things, company X is VERY BIG, and kind of neglects segment Y (which is not core to its business model). So the private equity firm provides some TLC to Y such that it can dump it with a high exit multiple.

c) We have a Leveraged Buyout (LBO), which involves a majority control takeover of the equity of a profitable, mature public or private company. Investments here typically range from $50mm-$10bn (with a 50-80% leverage). The idea is to use the company's cash flow to pay down the debt. The emphasis is on revenue and profit margin growth, and maximising that exit multiple.

d) And finally we have Distressed Investment. These deals typically involve purchasing the debt or equity of a company that is at risk of default, at a discount (at a discount because it's at risk of default!). So this could involve Corporate restructurings, bankruptcies (when things are NOT doing well). Investments can range from $10mm-$5bn (with leverage ranging from 0 to 95%). The key here, which is very tricky, is hoping... (no) predicting with quantitative analysis and wisdom (lol) that the company will not default and helping to improve operations such that it remains solvent.

https://www.youtube.com/watch?v=TNtTM5glY04

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Are there any fixed return instruments anymore? Something that gives guaranteed, maybe low rates but don't have downside? Noob here, thanks!

Posted: 22 Nov 2019 06:34 PM PST

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