Mothers are wise and wily creatures providing sage advice to us as we grow up. If yours was like mine one of her favorite warnings was “never take anything from strangers.” Should that warning also apply to private equity even though we aren’t children anymore? Having worked with both sides, Private Equity (PE) and Owners of companies too many Leaders are ‘babes in the woods’ in their first endeavor with private equity.
The literature will tell you a lot about preparation for raising funds from PE firms like side decks etc. and if you have colleague’s or friends who have worked with PE firms, they will have advice. In my experience the following are a few things that other people seem to leave out and or the literature doesn’t cover at all. Here they are some brief thoughts.
There is a saying about raising capital, ‘go looking for it before you need it’. Private equity capital is no different than angel capital in that personal relationships make it easier. Make it a business priority to cultivate a small handful of respected PE firms in your space. Not only will they be a potential source of other people to network within your space, but they are also a different source for industry news.
Knowing the difference between being in a closed or opened fund is important and easy to find out. One item overlooked however is what I call fund placement or technically the ‘duration of the fund’ on closed ended funds. Closed ended funds have a 10-year life cycle. Knowing where you are in a funds life cycle will identify questions you need to raise in your due diligence of the firm. It will also give you insights into recommendations or actions they seem to be pushing for after the investment is made. PE firms make different decisions/choices given how many years are left before liquidation.
Know how other firms they are invested in are doing. Poor performing companies they are invested in may impact recommendations and decisions regarding yours. If their current portfolio of companies don’t have a history of good performance be aware. Their capital needs are the same as yours in that they have to ‘pay the piper’ all the time also.
More than likely the PE firm will want a number of seats on your board. Find out who that will be. Do extensive due diligence on who those people are to assure you can work with them. Who’s the primary lead? Get permission to visit with Leaders from other companies they are or have invested in. Even when things are going right, some people can be a pain in the ass to work with.
Last but not certainly the least, know what your tolerance is for people asking you really hard questions and questioning your decisions. Leaders always overestimate their ability to be open-minded and take criticism. Ask your wife or children to give their honest opinion of you in these two areas. The people I have worked with in PE firms ask mostly good questions and are not shy about giving critical feedback to Leaders.
Rule number one; PE firms don’t represent any shareholders other than themselves and their investors. Rule number two, refer to rule number one.
Raising capital always takes longer than anticipated. Getting ‘desperate’ for an infusion of capital more often than not leads to making bad decisions.