Late-stage business owners often talk to our team about Venture Capital (VC) firms having interest in acquiring their companies. At the same time, start-up businesses talk to us about seeking investments from Private Equity (PE) firms.
If you’re a business owner and you’re looking to raise capital and/or sell your company – who should you be talking to? It’s important to understand the key distinctions between the two types of firms in order to save yourself time and to maximize the value of your relationships. Here’s what you need to know:
Investment Thesis
PE firms focus on mature companies … typically five-plus years in business with proven cash flow. While these companies are typically firmly established, they may be deteriorating or not making the profits they should be. PE firms provide working capital that is often used to fund new product or service line development or enable organic expansion. To the same extent, they will likely be seeking add-on acquisitions of other complimentary businesses in their space.
VC firms mainly invest in smaller start-up operations that have a high-growth potential. As a result, VC firms are typically industry-focused and function in the technology, biotech, healthcare, and cleantech industries. In general, VC firms tend to invest in riskier businesses than a traditional bank or PE fund is willing to take on. This type of thesis is more apt to generate home runs or strike-outs versus the PE model, which is somewhere in the middle.
Investment Risk and Percentage
PE firms invest in already established companies, often buying a 100 percent ownership stake. Since they take total control, their risk of absolute loss is minimal.
VC firms focus on early-stage and start-up companies. On the opposite side of the spectrum from PE firms, VC firms typically make smaller investments across many start-ups, diversifying their risk. Start-ups do not have the track record of success that established companies have and these are riskier investments. It’s likely that most of the companies in the portfolio may fail, but if one company becomes “the next big thing,” they could still earn significant returns, thus making the risk favorable. PE firms can’t afford that level of risk – one failed company could doom an entire fund.
Value Creation
Both firm types aim to earn returns above those of public markets yet do so differently. VC firms rely on the growth from their investment and companies for their own valuations to increase. Without some financial growth from their start-up investments, VC firms won’t yield any returns.
PE firms have the upper hand in creating more value through “financial engineering,” involving multiple expansions, debt pay-down, and cash generation. Again, because these companies have turned a profit already in the past, it is expected that they should be able to increase their earnings into the future, under the tutelage of an experienced PE firm.
Our team specializes in working closely with middle market PE firms. If you are looking understand how you or your firm fit into the private capital matrix, contact us today.
Symmetrical Investment Group is pleased to announce a new platform investment, one portfolio add-on acquisition, one divestiture of a division, and two strategic real estate acquisitions of properties supporting operating companies.
In February, Symmetrical backed an operating partner in the acquisition of Graboyes Commercial Window Company, a US Top-50 regional commercial window installer specializing in retrofit and design-build applications. Graboyes provides integrated window system solutions to architects, developers, building owners, managers, energy companies, and general contractors to develop, produce, and install commercial window systems for historical restoration, new construction, high-rise renovations, apartment buildings, schools, universities, hospitals, and condominiums. For more information, please visit www.Graboyes.com.
In March, Symmetrical Portfolio Company, Alyan Pump, was sold to PumpMan Holdings, LLC. PumpMan is a Portfolio Company of SoundCore Capital Partners. Alyan was founded in 1955, and serves customers in the municipal, commercial, industrial, and residential markets in the Philadelphia area and across the mid-Atlantic region. The company will continue to operate under the Alyan brand and will continue to provide its customers with exceptional products and services as part of PumpMan Holdings. For more information, please visit www.AlyanPump.com and www.PumpMan.com.
In April, Hillside Acquisitions Group acquired Anco Eaglin, Inc., a 115-year-old company that focuses on designing, manufacturing, and selling rendering, industrial processing and related equipment for food, chemical, and associated industries. Anco serves customers in the US and Globally who buy products including material handling systems, cookers, dryers, condensing systems, crushers, grinders, pre-heaters, miners, food processing equipment, tallow and lard separation equipment. Additionally, services include equipment and plant layout, ongoing repairs and maintenance, equipment rebuilds, installation, and training. For more information, please visit www.AncoEaglin.com.
To further support its’ thesis of holding assets for the long-term, Symmetrical is proud to announce that it has acquired two state-of-the-art buildings in March and April, comprising of 75,000 square feet, and is also in the process of constructing a 100,000 square-foot building. These buildings will allow for continued organic and acquisition growth over the next few years.
Contact us for more information.