Private equity firms are essentially financial investors. When pursuing a financial investor, you should consider that their investment criteria typically varies from a typical industrial investor.
Regarding investment objectives
A corporate looking to invest often seeks control over a company’s management, and in turn, are inclined to make long term investments. Their rationality behind investing is to strengthen their own company or business group’s strategic abilities.
Financial investors mostly look to make a profit on the money that they’ve invested, which resultantly leads to more medium term investments that maintain no responsibility or management capacities in the company.
Additionally, private equities look for acquisition opportunities at bargain prices (they know how to negotiate well), which they will ultimately help to create value within by introducing improvements in the target’s management profile or by growing it through further synergetic acquisitions. Before embarking on an operation, they make in depth studies about the probabilities for exit strategies that will offer them sizable returns.
When structuring payment methods, private equity firms are more creative than a corporate as they have more experience. Resultantly, they can give incentives to the directors, or agree on creative financing methods on the part of the seller according to their objectives (something that corporates cannot do as they buy companies to integrate them into their own, thus it’s very difficult to measure the fulfillment of these objectives).
As for the price variable, if a corporate is really interested, it usually wins the battle; it can pay more because it can generate synergies with the acquired company or the acquisition can improve its competitive position in the long run.
Their way of financially evaluating a company is usually different: while corporates looking to invest focus more on synergies, financial investors focus on a return on investment and, by way of looking for financial profitability, are focussing on debt capacities, which plays a central role in the transaction for them.
Industrial investors conduct slower studies and don’t pay as much attention to specific opportunities. They are willing to miss out on opportunities because they know the sector well, and that sooner or later, more opportunities will arise. Because of that, an industrial investor will very rarely overpay. Private equity firms feel more pressure on not missing out on opportunities, and in turn, can be more abrupt with their decision-making.
An industrial investor’s due diligence is easier as it has extensive experience within the relevant sectors, and can resultantly observe and understand the valuable variables. It looks at the industrial points and how they can fit into its own project.
Moreover, industrial investors try not to auction. Auctions are set up within restricted time slots and, sometimes, this lack of time doesn’t let them thoroughly analyze or determine strategic fits. Generally speaking, as a business owner you will probably feel more at comfortable speaking to an industrial investor as they will speak your language.
The biggest challenge that emerges with these opportunities is knowing how to approach them and to not be deceived. If you are looking for an investor and can’t figure out your best option, do not hesitate to contact us for strategic advisory!