Should you invite PIGS to your party?

hen you have made the decision to take your firm to the market and look for the appropriate acquirer, you obviously want to maximize your company’s value. An investment banking firm like Aspen Mergers and Acquisitions might inform you that the most efficient way to do this would be to market your company to both strategic and financial buyers. Strategic buyers are those companies that either do the same thing that your firm does or have some synergistic connection to what you do. Financial buyers, Private Investor Groups or Private Equity Groups, commonly referred to as PIGS, invest private equity in diverse companies and industries. Since you might be unfamiliar with the private equity sector, you may ask your investment banker whether you want to invite these PIGS to your party. The answer is a resounding “YES.”

Unlike Venture Capital (VC) firms that invest in early stage entrepreneurial firms characterized by significant intangible assets, which expect years of negative earnings and are unable to raise any significant bank financing, Private Investor Groups (PIGS) look for buyout and recapitalization opportunities with more established firms. They normally have the ability to bring their own investors’ equity capital into a deal as well as being able to secure senior level and mezzanine level debt instruments. This flexibility enables PIGS to create an acceptable leveraged capital structure that adequately reward their investors while not endangering the company’s cash flow. Once a transaction has been closed, PIGS generally participate actively in the management of the

new company (Newco). This active participation not only takes place at the Board of Directors level but, also at the operation level. This valuable assistance provides the Newco’s managers with a level of overall business expertise that they most likely did not previously possess. Moreover, since many of the Private Investor Group’s investors have been, or still are, active in the business community, they are able to bring synergistic opportunities to the firm that were previously impossible to obtain.

Private equity funds typically have limited and general partners. The limited partners are institutional and individual investors who provide capital. These are limited in the sense that their liability extends only to the capital that they contribute. A private equity fund is typically raised in several stages and a PIG may have separate funds, or tranches of new equity, to pursue their target acquisitions. Investors in private equity funds are eager to avoid opportunistic behavior by the general partner. As a result, there are usually a series of contractual provisions or restrictions that govern each fund. Here are some examples of restrictions that could be placed on a private equity fund by its investors or limited partners:

1. Limitations on the size of the investment in any one firm.
2. Limitations on co-investments with the private equity organization’s earlier and/or later funds.
3. Limitations on distributing the profits of the Newco and the need to reinvest all the profits back into the company to maximize growth.
4. Sets the minimum return, or IRR hurdle, that the investors want to achieve.
5. Limits the amount of funds invested in any one industry.

PIGS are compensated for their efforts in several ways. First, they are usually paid a handsome transaction fee when the deal closes. This fee is earned by the PIG as a result of their extensive efforts to seek out, research and close opportunistic transactions. Second, they may elect to have the Newco pay them an annual management fee. This assists them in recapturing their investment in the transaction and rewards them for then ongoing activities in assisting in managing the operation. Third, they may elect to take some form of stock, either common or preferred, in the Newco and obtain payment when the company has a future liquidation event such as a recapitalization or another buyout. This is called carried interest and generally signals that the PIG is confident in his ability to create future value for the firm. It is very likely that you will see a combination of these in a term sheet that you might receive. An investment banker like Aspen Mergers and Acquisitions should be well versed in these techniques and should be able to confidently guide you through this confusing maze.

At Aspen Mergers and Acquisitions, we have carefully developed and crafted unique and lasting relationships with over 750 domestic and international private equity groups. These relationships have taken years to cultivate and represent a major reason why Aspen M&A can successfully market your firm to the best buyers in the world. Therefore, it truly makes sense to invite PIGS to your party. Whether your objective is to retire from your company after transitioning your business to a new owner or simply to take some hard-earned equity off the table and continue to work with the Newco for many years to come, a PIG may be the best guest at your party.

Please contact us at Aspen Mergers and Acquisitions and give us the opportunity to have a no cost conversation with you about the acquisition and valuation process. We promise to introduce you to a host of PIGS.

Robert A. Veri
CEO

About Aspen M&A

Aspen Mergers and Acquisitions, Inc. are specialists in deal making with over 80 years of aggregate experience, serving clients nationwide through our offices in Los Angeles, Atlanta, Vail and Boston. Our mission is to enable middle market business owners to capitalize on their business value through transactions resulting in liquid equity. We offer a full range of professional services including contact with acquirers founded on our long standing buyer relationships. Please contact us for a free consultation. We charge no up-front fees and only get rewarded if a transaction closes. We are results driven and we would welcome having a private and confidential discussion with you.