Like public, privately-held, or family companies, those owned by Private Equity (PE) firms have their own style of running a firm.  Understanding their style will help you with both pursuing a role and being successful.   Please note that I am simplifying the PE world – so if you consider a role with a PE firm, more research is necessary.

How do PE firms operate?

·         Using very simple terms.  PE firms raise capital in an ‘investment fund’.   That capital is used to acquire firms with strong expectations for growth.   After a holding period, the ‘investment funds’ are liquidated by selling the companies owned by that fund.   If all goes to plan, the gain on the sale is split between the investor and PE firm.

Who works for PE firms? 

·         I’ve met with several dozen PE firms and generally speaking most of the team comes from M&A or Investment banking backgrounds.    Why?   Because their focus is generating a return on capital.

Who manages companies owned by Private Equity firms?

·         Besides putting capital to work, the second key skill of PE firms is selecting solid management team to invest in.

·         Many firms will bring in operating executives to help select firms, but even those executives only serve in an oversight capacity.

How long do PE firms own a company?

·         The holding period for PE firms is usually 5 – 7 years.

·         Increasing EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) during the holding period is the prime objective, so they can sell the company at a higher value than when they acquired it.

·         Understanding the holding period is important as an employee.  If proposed strategies/investments do not generate a higher EBITDA before the end of the holding period, then they are generally not approved.

Will PE firms invest into the companies they purchase?

·         Absolutely.  Many PE firms will buy a marquee firm and acquire other smaller firms to ‘roll-up’ under the initial firm, as the management team has the strength to run a larger operation.

·         PE firms will provide the management team with a specific amount of money that is available for acquisitions which fit their investment criteria and timing.

Who do PE firms like to hire?

·         Generally speaking, no one.  Why?  Because they would rather stick with the team they acquired.

·         If a firm needs to hire someone, especially in management, the focus is on hiring someone from the industry.  If they have experience with prepping firms for sale, then even better.

·          PE firms simply do not have an extended period to develop talent, so better to buy those who can immediately contribute toward EBITDA growth.

What happens when PE-owned companies are sold?

·         Sold to financial buyer:  Generally, he management team and company continue to operate as usual – just under different owners.

·         Sold to strategic buyer: A strategic buyer is more likely to have their own management team and staff – which will result in more change for the existing staff.

So what to expect

·         Focus on strong financial control (read: cost control)

·         Company will have debt (part of the PE acquisition)

·         High expectations for near-term returns

·         New ownership and possible need to find a new firm