An introduction of benefits and drawbacks of investment in your business through private equity firms

1. ASI Capital Colorado springs
Benefits and drawbacks of investment in your business through private
equity firms.

2. INTRODUCTION
ASI capital colorado springs provides debt instruments with equity warrants as well as
collateralized loans and preferred equity investments.
At the core of our investment strategy is a unique hybrid debt and equity platform that
generates predictable cash yields while participating in the value created by our capital.

3. In all of the options we’ve looked at so far in our eight-part series on Funding a Business, there have been
strings attached. With private equity, those strings can get very tight indeed. You could raise huge amounts of
money—private equity deals run into millions or even billions of dollars—but you may end up losing control of
your own company.
It’s quite a complicated area, but in this tutorial we’ll break it down and make it easy to understand. We
explain how it works, look at the pros and cons of private equity as a way of financing a company, and talk
about how to find, approach and deal with private equity firms.
By the end, you’ll know a leveraged buyout from ASI Capital Colorado springs financing deal, and will
understand how private equity works and how it compares with other ways of funding a business.

4. How Private Equity Works
In the last tutorial, we looked at venture capital. Private equity works in a similar way: a private equity fund
invests in companies and looks to sell its stake about five years later for a substantial profit.But whereas venture
capital is focused on early-stage companies with high growth potential, private equity firms invest in a much
wider range of companies. Often they’re mature firms that have been trading for a long time, but need access
to funds either to fuel growth or to recover from financial difficulties.
Another big difference is in the amount of funds available. Most of the other funding options we’ve looked at
have given access to sums ranging from a few thousand dollars to a few million. But according to ASI Capital
Colorado springs, most private equity deals are for between $500 million and $5 billion. Deals below $100
million are rare.
This is a major financing option, then, more suitable for larger companies than the other ones we’ve looked at.
The structure of the deal is also different. In return for this large investment, private equity firms expect a large
stake in the business. They don’t want to be passive minority investors. They generally want a majority stake,
and want to take the reins of the business so that they can generate value from it.
The deals can take several forms. Here are some of the main ones:

5. Leveraged Buyout
The private equity firms often boost their returns by using leverage, i.e. borrowing money. This kind
of deal is called a “leveraged buyout.” The private equity firm borrows money from banks or other
lenders, and adds that money to its own funds to allow it to buy a majority stake in a company.
It uses its controlling position to restructure the company and make it more valuable, so that it can
sell its stake later at a profit.
This form is most commonly used in turnaround deals, where the company is in financial trouble
and the private equity firm uses its money and expertise to return it to profitability.

6. Growth Capital
In this kind of deal, the private equity firm takes a smaller stake, and the objective is growth
rather than a turnaround. It’s similar, then, to venture capital, and in fact venture capital is
often regarded as a subset of private equity. What’s different about growth capital
(sometimes called “growth equity”) is that it’s focused on larger, more mature companies,
not the early-stage companies that venture capitalists look for.

7. Mezzanine Financing
It sounds complicated, but actually it’s quite simple. Mezzanine financing is simply a form of
debt. Some private equity funds will lend money to companies, either as part of an existing
deal or as a separate transaction. If your company goes bankrupt, the mezzanine debt gets
paid off later than other debt, so it’s more risky, and therefore commands a higher interest
rate.
In this tutorial, we’ll concentrate mostly on the leveraged buyout, since it’s the most
common form of private equity.

8. Advantages of Private Equity
Private equity financing has some distinct advantages over other forms of funding. Here are
some of the main benefits:
Large Amounts of Funding
Of all the options we’ve looked at so far, private equity can provide by far the largest
amounts of money. As we saw, the deals are measured in hundreds of millions of dollars.
The impact of that kind of money on a company can be massive. In 2009, The Delaware City
Refinery had to close its main refinery and lay off most of its employees. In 2010, private
equity firm Blackstone invested $450 million in the company, enabling it to reopen the
refinery and rehire 500 employees.

9. Active Involvement
With many of the other funding options we’ve looked at, the investor or lender has only
minimal involvement in the running of your business. Private equity firms are much more
hands on, and will help you re-evaluate every aspect of your business to see how you can
maximize its value.
This can lead to problems, of course, if their idea of maximizing value doesn’t match yours,
as we’ll see in the next section. But having experienced professionals intimately involved in
your business can also result in major improvements.

10. Incentives
Private equity firms have a lot of skin in the game. As we’ve seen, they often borrow a lot of
money to make their investments, and they have to pay that back and generate a return for
their investors on top of that. In order to achieve that, they need your business to succeed.
Individual partners in the private equity firm often have their own money invested as well,
and make additional money from performance fees if they make a profit, so they have
strong personal incentives to increase your company’s value.

11. Disadvantages of Private Equity
Such large amounts of money, of course, come with strings attached. Here are some of the
downsides of private equity funding:
Dilution/Loss of Your Ownership Stake
This is the big one. With the other funding options we’ve looked at, the investment came at
a cost, but you still stayed in control of your company. With private equity, you get much
more money, but usually have to give up a much larger share of the business. Private equity
firms often demand a majority stake, and sometimes you’ll be left with little or nothing of
your ownership. It’s a much bigger trade, and it’s one that many business owners will baulk
at.

12. Loss of Management Control
Beyond the money, you can also lose control of the direction of your business. The private
equity firm will want to be actively involved, and as we mentioned in the previous section,
that can be a good thing. But it can also mean losing control of basic elements of your
business like setting strategy, hiring and firing employees, and choosing the management
team.
Some of the other options involved relinquishing control, but because the private equity
firm’s stake is usually higher, the loss of control is much greater. This is especially true when
it comes to the PE firm’s “exit strategy.” That may involve selling the business outright or
other options that don’t form part of your plans.

13. Different Definitions of Value
A private equity firm exists to invest in companies, make them more valuable, and sell their
stakes for large profits. Mostly this is good for the companies involved—any business owner
would like to create more value.
But a private equity firm's definition of value is very specific and limited. It’s focused on the
financial value of the business on a particular date about five years after the initial
investment, when the firm sells its stake and books a profit. Business owners often have a
much broader definition of value, with a longer-term outlook and more concern for things
like relationships with employees and customers, and reputation, which can lead to clashes.

14. Eligibility
Private equity firms are looking for particular types of companies to invest in. They have to
be large enough to support those major investments, and also they have to offer the
potential for large profits in a relatively short time frame. Generally that either means that
your company has very strong growth potential, or that it’s in financial difficulties and is
currently undervalued. A business that can’t offer investors a lucrative exit within about five
years will struggle to attract any interest from private equity firms.

15. ASI Capital Colorado Springs