According to analysts of the private equity industry, nearly all of the North American private equity firms are holding around $1 trillion ‘dry powder’ in their hands, in addition to nearly $3 trillion in AUM (Asset Under Management).
That’s a lot of money, but what really are private equity deals, and how they are beneficial to us? In this article, we are going to talk about everything related to private equity deals to get a better understanding of what it contains.
What are Private Equity Deals?
Private equity deals are the agreements that take place when a certain investment is made with the capital which is not listed on a public exchange forum.
Normally, the investors or private equity funds put their money in undervalued entities and revamp them once they are about to become public companies.
As we see in the market, many of the initial investment opportunities that arise, do so quickly, but the materialization of private equity deals is a whole different ball game, as it can take from a few months to over a year to take shape.
A private equity deal is a complex process that involves a lot of different steps and processes based on a lot of information gathered and research done by experts to ensure that the assessments and the analytics are of the topmost accuracy.
Many of the top accredited investors spend a lot of their hard-earned money on private equity investments, so it’s high time that we give private equity deals the respect that they deserve.
This is because holding periods of such funds are often quite extensive and investments need quite some time to turnaround and exit.
Let’s take a look at some of the benefits that private equity provides your business.
Benefits of Private Equity
Here is a list of private equity benefits that we are going to discuss in this article.
- Cash infusion
- Management incentives
Let’s take a look at these benefits in detail, shall we?
1. Cash Infusion
Almost all of the private equity groups have immensely deep pockets and can provide substantial financial resources that can easily fuel the growth of the company. This cash infusion provides capital to buy new equipment or to launch a striking marketing effort for the company.
Private equity can also help you find all of the different resources that you ever wanted for your business but couldn’t get. There are all sorts of hands-on groups that help you to maximize your company value and helps you to meet new business goals and milestones.
Some private equity groups host annual mastermind events that are specifically designed for company leaders and CEOs that provide an opportunity to share all of the emerging trends and the best practices to envelop those trends into the company.
These types of events are perfect for creating useful business connections.
4. Management incentives
If you are a company that wants to reward its management team, then private equity is an amazing way to do that. Private equity investors make sure that your management team that has all of the bells and whistles necessary, stick around and generate more value towards the company.
Let’s now take a look at the different phases of a basic private equity deal and find out what it contains.
Phases of Private Equity Deals
Here is a list of the different phases of private equity deals that we are going to talk about in this article.
- Sourcing and Teasers
- Signing a Non-Disclosure Agreement
- Initial Due Diligence
- Investment Proposal
- The First Round Bid or Non-Binding
- Further Due Diligence
- Creating an Internal Operating Model
- Preliminary Investment Memorandum
- Final Due Diligence
- Final Investment Committee Approval
- Final Bidding Bid
- Signing the Deal
Let’s take a look at all of them in detail and find out how they help construct an airtight private equity deal.
1. Sourcing and Teasers
The first step in creating a private equity deal structure is ‘deal sourcing’. This sourcing includes the assessment and the discovery of a credible investment opportunity.
A teaser on the other hand is a one or a tow paged summary which is sent by the financial intermediary about a specific company or business which is up for grabs.
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2. Signing a Non-Disclosure Agreement
If the teaser is somewhat acceptable to the client, they will move forward and sign an NDA or a Non-Disclosure Agreement.
When they sign the NDA, the financial intermediary will provide the client with a CIM or a Confidential Information Memorandum that includes all of the necessary information about the teaser like financials, investment thesis, projections, and the capital structure associated with it.
If everything goes well and an investment opportunity is sourced, the NDA is signed directly with the target company and the middle-man is set aside.
3. Initial Due Diligence
In the initial phase of this whole process, due diligence is conducted in order to make sure that there is a complete understanding of the target company and the client.
This due diligence includes research and information gathering about the company in question and the industry it resides in.
It also helps in estimating the ROI according to the projects provided by the company’s management.
4. Investment Proposal
After the initial due diligence procedure, the investment team associated with the equity deal prepares a detailed investment proposal which is further presented to the investment committee.
The purpose of the first investment committee meeting often changes from one private equity firm to the other.
5. The First Round Bid or Non-Binding
The next step is for the investment team to provide the target company with a non-binding letter of intent for the transaction.
This is under a specific criterion that is provided by the target company’s management. Sometimes, a valuation range is provided rather than a specific amount.
6. Further Due Diligence
The next step is where the sellers of the target company provide some inside info or confidential information about the company.
This information includes:
- Operation records
- Property agreements
- Employee details
- Employee agreements, and much more.
7. Creating an Internal Operating Model
The next step in the process is to create an internal operating model. An operating model is a complex and detailed, revenue and cost breakdown. Some key drivers in that breakdown are:
- Number of customers
- Fixed vs. variable cost structure
- Raw material costs
- Renewal rates
8. Preliminary Investment Memorandum
PIM is a 30- or 40-page document that includes all of the little details about the investment opportunity, summarized. This consists of the following key sections.
- Executive summary
- Market and industry overviews
- Company overview
- Financial overview
- Valuation overview
- Exit details
- Proposed project plan
9. Final Due Diligence
In this stage of the process, the private equity deal team interacts with the investment back and the upper management of the target company on an everyday basis.
10. Final Investment Committee Approval
In this stage of the whole process, the key issues associated with the deal are pointed out by the investment committee.
11. Final Bidding Bid
This final bidding bid includes a final buying price that the client offers to the target company, preliminary merger agreements, and all of the financing documents from the investment banks.
12. Signing the Deal
In the last step, a purchase agreement between the two parties is created where they both sign the deal and the whole transfer of power is completed.
This was our short guide on private equity deals and how they benefit our daily businesses. If you think that we mentioned something incorrectly, then write to us and we will check it out ASAP.