Private Equity Transactions with Mark Hauser
Private equity is a niche in the financial services sector. Firms in the industry are highly selective in their investments due to the fact that more often than not they are purchasing 100% of a company, or at least a controlling stake. The goal of a private equity investment is to transform the business for the better and eventually sell it for a profit. Therefore, the companies they target are those identified as having a strong potential for growth, whether that be due to a solid business model, valuable assets or other specialized cases.
Mark Hauser, co-managing partner of Hauser Private Equity, says because private equity firms take an active role in restructuring and streamlining the companies they invest in, they must be sweeping in their due diligence process. This due diligence can be divided into three categories: commercial, financial and legal.
Commercial due diligence looks at a company’s past and attempts to use this information to predict its future. This can include evaluating consumer perception of the business, industry growth potential and financial performance amongst others.
Financial due diligence takes the financial performance review of the commercial process and dives deeper, taking a scientific approach to evaluating its financials. Rather than viewing the numbers in the context of the market at large, the question in financial due diligence is: do the numbers add up?
Legal due diligence involves bringing in a team to fully evaluate potential liabilities involved with the investment. These can include not just verifying the company is compliant with all laws and also regulations, but also any legal consequences the private equity firm may face as a result of the acquisition.
According to Mark Hauser, if the due diligence process does not reveal any reasons to not move forward the next steps involve completing the transaction. The deal will be presented to the firm’s investment committee who must approve its funding structure, after which the legal teams for both the firm and the target company will negotiate final transaction terms. At the finalization of the deal, the private equity firm releases the funds and the company transfers its equity.
Once a company is within the portfolio of a private equity firm, work can be done to fast-track its growth. While private equity firms take an active role in the companies they invest in, they focus their efforts in high-level operations efficiency. A partner may sometimes join the board of directors and the firm might facilitate a change in management, but their main concern is expansion and more often than not remain hands-off in the day-to-day of the business.
Private equity firms earn money by charging management and performance fees from those who invest in their private equity funds. As a result they must regularly update investors on the progress of the companies within the fund, including providing updates on operations, financials, and company valuations.
A private equity transaction typically does not involve long-term investment in an asset. Mark Hauser explains that a focus is placed on realized gains and an exit within three to seven years of the original investment is standard. These exits can result from an acquisition by another company, but also may involve an initial public offering that divests the firm of its ownership through taking the company public.
