Working with Private Equity can be easy and interesting. The content on this page shares a lot of what I learned in ten years of working for a Private Equity controlled company.
How I Began Working WIth Private Equity
Ten years ago next month, I began working with Private Equity. When I started at Sightpath Medical, Charlesbank Capital Partners, and H.I.G. Capital was seven months into their investment in TLC Vision Holdings, LLC.
Private Equity partners refer to people who work in their portfolio companies as “operators.” The first time I heard that I wasn’t sure if I liked it or not. Now I’m used to it, I guess?
In June of 2010, Charlesbank and HIG bought TLC Vision Holdings out of bankruptcy. TLC Vision Holdings had TLC Laser Centers, VisionSource, Sightpath Medical, and Private Ophthalmology practices.
Today, Sightpath is the last company they own in this fund. And it’s quite a story why that’s true - but that’s for another section…
What Is Private Equity?
Private equity is a form of private financing, away from public markets, that allows funds and investors to directly invest in or buy companies.
A private equity fund has Limited Partners (LP), who typically own 99 percent of shares in a fund and have limited liability, and General Partners (GP), who owns 1 percent of shares and have full liability. The GPs also execute and operate the investment.
This graphic from Investopedia explains Private Equity well:
How Does a Private Equity Firm Make Money?
The main source of revenue for private equity firms is management fees. The fee structure for private equity firms varies and usually includes a management fee and a performance fee.
As an example, I’ve learned working with Private Equity, that some firms charge a 2% management fee annually on managed assets and get 20% of the profits gained from the sale of a portfolio company.
How Does a Private Equity Firm Decide Where to Invest?
Like any business, PE has firms that specialize in different types of investment strategies. For instance, when Charlesbank and HIG bought TLC Holdings, it was considered a “Troubled Asset” situation.
The most common strategy is called “leveraged buyout.” This is the stuff movies are made about and uses the age-old adage of making money using other people’s money.
What Private Equity typically look at in an investment target is:
- Market - what is the size? Is it growing?
- Model - how does the business operate?
- Management - are the people running the business doing it well?
- Momentum - is there deal flow in this sector? (Think; Can we sell it later for more money?)
What Effect Might Private Equity Have on a Market or Company It Buys?
This is an interesting question with varied answers depending on whom you ask. In my industry, Ophthalmology, there is a tremendous rush by Private Equity to acquire physician practices and surgery centers. I wrote about it here.
What attracts Private Equity to Ophthalmology is the demographics of the patient population and the Ophthalmologists who care for them. I write more about this topic in various places on this site. So stop back often and nose around, you might find some interesting nuggets.
These Are My Top Six Observations in Ten Years Working With Private Equity
In no particular order, these are six observations I’ve made working with Private Equity
Uncertainty is constant
Private Equity buys and sells companies. At some point when you are working with Private Equity, your company will be sold. Accept it.
There is not a money tree out behind the building
Employees and customers sometimes seem to think there is an unlimited supply of capital because the PR firm has a lot of assets under management. They do, and they are good at using it to make more money. Not for unlimited spending.
Knowing you are supported and networked is important
Most importantly, I’ve learned over the years that when a PE person asks a question, it’s because they want to know the answer. It took me a while to learn that if I didn’t know something, it didn’t make me look stupid or lazy to admit I didn’t have an answer.
You see, PE folks have a network of portfolio companies and lots of exposure to deal research. This information sometimes helps them to think about a situation different than those of us working in the business every day.
Aligned incentives work best
I learned the most about this one when we were going through a transaction process. All of the potential investors were focused on how much of the transaction proceeds each of us planned to roll into the new entity.
On a day-to-day basis, again, incentives point toward and reward growth.
What they want are people with their shoulder to the wheel, and working hard to grow enterprise value for the next deal. They do not like to be someone’s exit strategy.
They’re the smartest guys in the room and cycle through buzzwords
This is a statement, not a judgment or hyperbole. Most of them have advanced degrees, work long hours, and work in an environment that is highly competitive and lucrative. As a result, they're smart.
They do like their buzzwords! For example, in my early years, I often heard them describe people they liked and admired as “good critical thinkers.” That was high praise.
The last year-or-so, I’ve noticed them using the phrase “Pattern Recognition” a lot. Specifically, “She’d be a good addition to the team. I hear she has amazing pattern recognition skills.”
They scratch each other’s backs and love consultants
This observation is closely aligned with the previous one. I write that because if you look at consultants, many of them begin working with Private Equity before or after being a consultant. And many of them went to school together at prestigious universities, so they stay connected.
There’s nothing wrong with any of this. They’re just my observations. If you want to read a book to learn more about Private Equity - here's a good one called, "Private Equity."(Affiliate Link)
I am grateful for my ten years of working with Private Equity. And I hope for many more!
Most importantly, what is great about working for a Private Equity owned company is the people you work with. This is both inside the company and the people from the PE firm.
If you’re a doctor considering selling your practice and begin working with Private Equity, ask a lot of questions about their plans for the future. Because they don’t know how to run your business, and at least initially, they’ll still need you and your team to do that for the venture to be successful.
I’ll keep writing on this page about what I hear in the market about working with Private Equity. So stop back often, or fill out the form below to get a free PDF and begin receiving my newsletter about making marketing and selling easier with confidence.
Will private equity’s bull-rush into ophthalmology drive growth? Dick Lindstrom, MD addresses this notion in a podcast he did with Tom Salemi from OIS. Stated investment reasons by doctors (MDs) are access to capital and business expertise. Profit growth, cost reduction, and services aggregation are success drivers for private equity (PE) that I’ve heard. Will…read the post