Responding to Private Equity Solicitations
BY Mohit Kansal and Alexander Carbone
If you’re one of the asphalt contractors and producers who has received an email from a private equity firm wanting to “connect,” you’ve probably been left with a lot of questions. Aside from wondering what exactly private equity is, you might contemplate what type of firm fits your needs and how partnering with one would affect your business. With our 35-plus years of experience, we can demystify this increasingly complex world.
What is a private equity firm?
These firms are set up to invest in businesses. Typically, they manage pools of capital contributed by pension funds, endowments, insurance companies, high net worth individuals and the like.
Each firm will have its own style of investing, some focused on certain ownership structures and others on specific industries. If you are receiving an e-mail or call, it is likely that the firm has identified asphalt and paving as an industry of interest.
These firms will typically invest in one of two ways. The first is a majority transaction (also called a “buyout”) where the firm will look at buying greater than 50% of your business. This provides liquidity for owners, who may continue as employees in the company with some equity ownership or may decide to exit the business altogether. However, this also means the private equity firm will have operational control of the business and drive its future growth plans.
On the other hand, some firms take a minority investment approach, where they buy less than 50% of the business. The existing owner and management team continue to run the business and are responsible for day-to-day decisions.
The reasons for taking on a private equity firm as a partner can vary. For some, nearing retirement can prompt business owners to consider succession planning; if the next step is not clear, a majority exit might be a preferred way to enter retirement.
For others, they may feel that growth has plateaued, and the business needs the professionalism and capital backing of a larger partner. In these circumstances, a minority equity partnership can be beneficial as the existing owners continue to own a large portion of the business, which may eventually lead to a more lucrative sale in the future.
Private equity firms may also inject cash into the business to fund purchases of equipment or support mergers and acquisitions (M&A).
Aside from financial backing, private equity firms can bring qualitative benefits to your business. As you grow, having access to a broad rolodex of advisors, board members and executives can be a value-add. Furthermore, access to a pipeline of M&A targets can be helpful if you are looking to grow through acquisition—these firms often speak to many players in the industry and have a pulse on potential targets for acquisition. Additionally, if the firm has the right experience, its personnel can help guide or build critical functions as your business scales. For example, this could include a business development team, sophisticated finance function or in-house M&A group.
Banking relationships are often an area where asphalt contractors can benefit from private equity firms. This can open better access to financial products, including loans and asset-backed lending facilities, which are particularly important for producers with significant fixed assets. Private equity firms open these doors through the success of their prior investments and longstanding lender relationships. Overall, a great first question to ask a prospective private equity partner is exactly what value they will provide when the deal is done.
It never hurts to have an initial conversation to understand what the firm has to offer and what a partnership could look like. However, it is important to enter every conversation with an understanding of your needs and wants to make the conversation productive. Some example questions for the representative contacting you could include:
- Why are you interested in my business?
- What experience do you have in the industry?
- What is your role in the private equity firm?
- Do you undertake minority or majority transactions?
- What would it be like post-investment—who would be involved, how would important decisions be made?
The list goes on. We encourage you to take the time and learn about the private equity firm before jumping into a transaction.
In the end, there is no one-size-fits-all answer but given the growth of private equity across all sectors, it’s important to understand if it’s right for you, and if not, how it may be impacting others—including competitors in your industry.
Mohit Kansal is the managing director of Clairvest Group. For more information, contact him at firstname.lastname@example.org or (416) 413-6017. Alexander Carbone is a senior associate for Clairvest Group. For more information, contact him at email@example.com (416) 413-6005. Clairvest has been partnering with entrepreneurs for over 35 years and is actively seeking opportunities to partner with asphalt and paving businesses.