MANNION: Buyout transactions have received attention because of their size and the amount of leverage they entail. However, private equity covers the universe of venture investing, buyout investing and mezzanine investing, and includes both majority and minority investment holdings.
T&R: What are the benefits of private equity ownership, beyond a less onerous regulatory burden?
MANNION: The public stock market has a very short time horizon. Investors expect consistent, growing profits every quarter, and shortcomings can cause the stock price to fall dramatically. By contrast, private equity firms can take a longer view, allowing companies to make the investments they need to grow, even if that cuts into profits for a quarter or two. Private equity firms focus on growing the long-term value of a company. Hence, they tend to focus on cash flow, return on capital, margin expansion and less on aggressive accounting to increase value. Moreover, private equity owners provide not just capital but expertise, contacts and strategic guidance, as well.
One recent study by Global Insight and the National Venture Capital Association tried to measure the impact that private equity investors have had on growing companies. The study showed that between 2003 and 2005, venture-backed companies were responsible for employment growth of 4.1% a year, versus 1.3% for non-venture-backed companies. During the same period, net sales at venture-backed companies increased by 11.3%, versus 8.5% for non-venture-backed companies.
T&R: What are the drawbacks of not being a public company?
MANNION: There are very few drawbacks. The private equity market has grown dramatically over the past few years, and there is enough capital available to fund almost any acquisition or growth strategy. Some vendors, customers and potential partners may perceive private companies to be less substantial and serious than those with publicly traded stock. It may be more difficult to complete acquisitions without stock as currency. But remember that many private equity-financed companies eventually can go public, but don't need to anymore, to provide a good exit to their investor. In fact, a good private equity partner can do much to get your company up to the financial and reporting standards that the public markets require.
T&R: What does it mean to have a more active ownership?
MANNION: Private equity investors can help you in many different ways, and provide much more than capital. They will generally place one or more of their senior people on your company's board. Then, as board members, they will work with you to maximize the value of your company, whether through helping you build your independent board, advising you on strategic issues, helping you raise the level of your financial systems and reporting to public company levels or helping you evaluate acquisitions and strategic partnerships. The most effective private equity owners don't micromanage or make day-to-day operating decisions. They focus on big-picture issues that can grow your business and increase your company's value. The key is to make certain your goals are aligned with your investors--enabling you to focus on running your business and maximizing value.