Why is it Called Private Equity Anyway?

“The beginning of wisdom is the definition of terms.” (Socrates)

Words that we encounter frequently have a way of engraining themselves in our mind, often attached to a visceral feeling more so than an academic understanding of what they really mean.  I’ll never forget when I first reflected on the word “convertible” and sheepishly realized that it wasn’t a coincidence that cars with the ability to convert from a hard top to no top had been given this name.  How many other words in our daily vocabulary fall into this category without our awareness of it?  For starters, what about the term “private equity”?

Based on a simple Capital IQ screen1, there are currently just shy of 1,100 private equity funds in the United States.  While their charge may be similar – deploying capital and managing investments – they are led by individuals with disparate backgrounds, egos and philosophies around how to achieve common goals.  This creates a dissonance in that the proliferation of private equity as an asset class has led many to view capital as an abundant & lifeless commodity, when the reality is that there are human decisionmakers behind that capital that give it personality.  Indeed, I’ve heard several business owners say something to the effect of, “If you’ve met one private equity fund…you’ve met one private equity fund.” Despite the practical reality of this diversity amongst the field of investors, private equity has become a monolithic shorthand for capitalists seeking to generate returns that beat the market.  Thus, I thought it was time to stop and examine the name “private equity”.

First, let’s see how the dictionary2 defines it:

  1. Private Equity (noun, ˈprī-vət \ ˈe-kwə-tē \) – equity in a business that is raised from private sources, as opposed to shares that can be traded publicly

Really?  I don’t know about you, but to me this was somewhat boring given the headlines and histrionics surrounding the industry which, according to the dictionary, is apparently just providing a non-public source of capital.  We’ll call this “Definition 1”.  What was more interesting was when I broke up the term into its component parts, private and equity, to see if that might reveal some less intuitive nuances, and indeed it did. Please examine the following definitions of each taken independently:

  • Private (adjective) – belonging to some particular person
  • Equity (noun) – the quality of being fair or impartial; fairness; impartiality

This made me pause.  Over the course of a 10+ year career in the business, having uttered the term probably tens of thousands of times I only recently realized that I may not have truly understood what it meant (or could mean).  For example, I’ll admit that I had never associated equity with impartiality given my narrow focus on its application within finance. If you take the analysis further and trace the word to its Latin origin, Aequitas, you learn that it stems from the notion of symmetry, or fairness, and in ancient Rome it was held as the concept of fairness between individuals.

I also realized that I had too often been mentally defaulting to what it meant from my perspective.  Using the definitions above and taking both words together, private and equity, you get very different meanings depending on whether you are buyer or seller.  From our side of the table as investors, it’s easy to focus on the returns potential that our capital can generate, but what should a business owner and management team expect in return from their equity provider? According to the definition, the seller should not only receive capital, but fairness during the negotiation and an unbiased partner with whom they can solve future business challenges together. This led me to consider the following alternate definition of private equity that we’ll call “Definition 2”:

  1. Private Equity (noun) – Capital invested by fair and impartial decisionmakers who are ideal partners for a company and its owner’s needs

I would argue that every private equity fund is a “Definition 1” firm insofar as they are all providing equity capital, but its the best ones that embrace “Definition 2”.  In other words, a business owner should focus not on the capital that a fund brings to the table but rather discerning whether an investor can address their unique needs and those of their business while helping to drive optimal outcomes irrespective of personal agenda.  Said another way, what if the expectation of a private equity fund was not in its provision of capital but impartiality supported by relevant industry or situational expertise?  My bet is that it’s the “Definition 2” funds that enjoy the greatest success and longevity in this business.

As a business owner, the hard part is finding your “Definition 2” private equity partner. This is especially true when you are meeting investors for the first time in the context of a transaction with the associated stress that can cloud judgement.  The best way to know that a group is going to live up to your expectations is to develop an early relationship with them.  Only then will be you be able to (hopefully) observe behavioral patterns that embolden your decision to proceed in deal discussions. In that spirit, this is a call to business owners to reach out to us for an introductory conversation to begin the journey in determining whether we can offer what you deserve in a partner.

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1Private investment firms based in the U.S. that are currently operating, have completed at least one deal, have raised a fund of at least $50 million and focus on growth capital, buyout and/or recapitalization transactions

2Per Dictionary.com

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy. 

Reasons an Independent Sponsor Should Partner with a Private Equity Fund

There once was a need for a fund,
to get a good deal or two done,
but the fundless became independent,
and closed deals until they ascended,
respected they are now bar none.

I wanted to present some thoughts on the primary reasons an independent sponsor (“IS”) would want to work with a private equity fund to get a deal closed. This is an important consideration in light of the increasingly established pools of capital available to fund IS deal flow. This relatively efficient array of options now includes family offices, SBIC funds, mezzanine lenders, special purpose funds raised to specifically invest alongside the IS community, and traditional PE firms.

The bottom line is that it comes down to what an independent sponsor is solving for when raising capital. Beyond the ever-critical certainty of close, an IS’s objectives can include things like maximizing economics, offloading the burden and expense of due diligence, and maintaining day-to-day governance control. So, here’s when you should place the call into your short list of trusted funds that you know have closed other IS-sourced deals.

  • You are a new independent sponsor and need to make efficient use of your time. Until you’ve closed a transaction or two and are generating fees to help keep the lights on, your highest and best use is finding the next deal to keep the pipeline full. The classic challenge in the deal business is that as soon as you start grinding through a transaction all new deal sourcing stops. This can leave you starting at square one as soon as your deal closes, or in pretty dire straits if it doesn’t. Best to let a dedicated fund with a fully-staffed diligence team run with the deal to let you get back to finding and structuring the next one.

  • You are looking for more capital than other channels can provide. Family offices and lenders can be a good option for the sub $5mm EBITDA deal, but what if you need more capital than they can provide? The good news is that some funds, like ClearLight, can and have funded both equity and mezzanine debt in their transactions to create a one-stop solution for larger deals. And, we can move faster than you think – from “hello” to “I do”, we’ve closed an IS-sourced transaction is 91 days.

  • You are not comfortable with the risk of dead deal costs. I don’t envy an IS trying to convince a family office or other capital source to absorb dead deal costs if the transaction doesn’t close. Dead deal costs aren’t fun for anyone, but if we commit to working through diligence on your deal, our commitment to you is that we will cover all approved transaction costs from the time of our involvement as well as any reasonable travel and legal expenses (up to a pre-negotiated cap) you’ve incurred alongside us. This is an issue we understand, and you won’t have to waste time getting us comfortable with the concept of dead deal costs.

  • You could benefit from a PE firm’s industry expertise. So, you’ve found your way to a deal that you’re excited about, but you don’t know the space as well as you’d like to. Chances are there’s a fund or two in your network with strong precedent experience that would be a great partner to help you evaluate the key risks and opportunities associated with the target company. If a fund has a current / former portfolio company in a related space, best to at least have a call to determine if there’s an opportunity to collaborate. Our portfolio company logos are up on our website for a reason.

  • You are not hung up on Board or day-to-day control over the investment. If you are trying to build a governance track record, perhaps going to a control-oriented PE fund isn’t the best strategy. You may just have conflicting interests, and that’s ok. However, if you are open to the idea of your capital partner being more involved than less, a fund with a proven track record for creating value through an active governance role might be a good option.

  • You want to partner with investors that are motivated to close. Nothing against the family office community, but they transact when they want to, not because they have to. An unfortunate reality about certain investors is that they are not motivated or compensated to close a transaction in the same way that a fund might be. If you have reservations about a family office’s conviction, you may want to reach out to your friendly neighborhood PE firm to avoid a deal falling apart at the one-yard line.

As you may have gathered, we’ve come to appreciate the independent sponsor community as an important extension of our investing activities and hope this provides some insights into when and why we’d like to hear from you. We’d be happy to discuss our experience and philosophy around working with independent sponsors further. Please call or email any time.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.  

Private Equity Fund Seeks Talented CEOs for Long-Term Relationship

Perhaps you’ve wondered what a private equity fund looks for in an executive. We’ve done a lot of thinking about the same question with the hope of finding “the one” (or, several “the ones” given that we invest in numerous businesses, but you get the idea). In simple terms, we’re often looking for someone who compliments our own set of experiences and perspectives and can help us get to the right answers through a shared vision. Heading into ClearLight’s 18th year, we can confidently say that, more often than not, Great Industry + Great CEO = Great Investment Results. As a talented executive, you are a critical part of our investing strategy.

Further, in light of elevated competition for good deals, we’ve increasingly realized that knowing the right CEO for an investment opportunity can be the difference between deal, or no deal. This need to know backable executives typically manifests itself when the founder of a target company seeks to retire after a transaction or a private equity firm, like ClearLight, wants to pursue a proactive investment thesis in an industry where having access to a “been-there-done-that” executive is the missing ingredient to kick off a search for a business to buy together. In either scenario, it’s often the CEO candidate that moves the needle in yielding a closed transaction. Thus, having a mechanism to routinely interface with proven executives looking for their next career challenge has become a strategic imperative in the deal business.

Given that our firm’s heritage stems from the successful sale of an operating company, and the leadership our firm is largely comprised of former C-level executives, we place a premium on knowing and working with top tier executive talent. And, regardless of the situation, great leaders are always called upon to (i) define vision & strategy, (ii) identify the gamebreaker positions and (iii) hire right when necessary to construct a team of “A-players”. So, the following are some things we look for in an executive to run one of our companies as key indicators of likely success.

  • Prior GM / CEO-Level Experience. There’s no substitute for experience, and we like to see someone whose been in key leadership positions before with full P&L responsibility. This is not to diminish the potential effectiveness of a first-time manager, we just have a preference to back someone who isn’t stepping into the seat for the first time.
  • Strong Mix of IQ / EQ. Yes, you need both. Einstein said, “…intellect…it has, of course, powerful muscles, but no personality.” Having the skills to not only define and execute strategy but also to lead and motivate your team is an important combination that often produces great outcomes. To be sure, we like working with someone that would score well on an IQ test, but we also like to see someone who can develop and inspire followers committed to a common mission. We can usually tell pretty quickly whether a CEO candidate truly cares about people and has a compelling philosophy around culture development.
  • Track Record of Value Creation. We all know that past performance is not always indicative of future results, but it’s a helpful indicator in determining an executive’s likelihood to execute on strategy and drive growth. We gain confidence if we see a pattern of long-tenured leadership positions culminating in one or more liquidity events.
  • Relevant Industry Expertise. It’s always helpful if we can count on a CEO having muscle memory and a strong network in an industry. Most sectors reveal an array of nuances once you immerse yourself within them, so it’s good to work with executives that have seen the movie before. An established network can also be helpful in surfacing off-market add-on investment opportunities and gaining industry intel that might not be available to a layperson.
  • Passion for a Business or Industry. We’ve found that CEOs with a passion for a given sector tend to be innovators that find ways to stay ahead of the competition, delight customers and are also more effective at attracting top talent to join the cause. Warren Buffet famously said that he tap dances to work – not to worry, we won’t be holding any dance competitions, but it’s nice to see an extra spring in the step.

So, if you possess the attributes described above, please get in touch with us. We look forward to sharing information about the current deals we’re pursuing and learning about any investment ideas you may want to discuss with the goal of finding a way that we might help you achieve your aspirations at this stage of your career.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.  

Capital is a Commodity, but Trust is Not

Peter Drucker famously said, “The most important thing in communication is to hear what isn’t being said.” That line is as true today as it was when he was first quoted. We have all dealt with people who are deliberately not fully forthcoming, and it can be challenging to assess a person’s trustworthiness if you are doing business with them for the first time. Unfortunately for many business owners, the process of bringing on a partner to invest in your company is rife with first-time introductions to interested parties. As a business owner, how then are you to determine who you can trust to shepherd the growth of your life’s work and most valuable financial asset?

One option is to trust your gut. Sometimes this works, sometimes it fails miserably. The other is to look to simple indicators that a person is going to follow through on what they say they are going to do. Here are a few tactics that might help you know if you’re being courted by someone that you can trust.

  • Ask yes or no questions. This is particularly important for the most critical questions you want answered. There’s immense power in both a succinct yes or no question and a corresponding, full-throated “yes” or “no”. Heavily caveated responses to basic questions signal the need to probe deeper into any areas where topics are not dealt with head on.
  • Be wary of overly rosy track records. Long-tenured investment professionals should be more than willing to humbly share the good, the bad, and the ugly from their careers. In this business, anyone who says that every deal has gone well for them is bending the truth at best and telling an outright lie at worst. Make sure you hear a balanced perspective on where they’ve been successful and what they’ve learned from their mistakes along the way.
  • Request references outside of the list that is provided. Have you ever performed a reference check on someone that didn’t go well when you were provided with a carefully curated list of contacts by the person in question? Do some digging on LinkedIn, and if you identify relevant contacts from a person’s or firm’s history of interest, don’t be shy about asking for introductions to them as well.

These are just some ideas for when you are in the early stages of your discussions with a potential suitor. However, there’s no substitute for developing a long-term relationship with a potential investor well in advance of your need / desire to transact such that you can both demonstrate consistency and integrity in your interactions to build mutual trust.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.  

From Bridesmaid to Bride: How to Win a Sell-Side Mandate from a PE Fund

From Bridesmaid to Bride: How to Win a Sell-Side Mandate from a PE Fund

Here’s a brain teaser for you – if a private equity fund invites four investment banks to pitch for one of their portfolio companies, how many groups will come in second?  Answer: three.

All kidding aside, the “you were our next favorite” speech, at best, offers cold comfort to the teams who put in countless hours on tight deadlines to prepare the intellectually rigorous and aesthetically pristine materials required to present qualifications, positioning perspectives and the ever-critical opinions on valuation.  I remember this frustration well from my days as an investment banking analyst whose job was to take the laboring oar in pulling these tomes together. So, amongst a competitive field of talented advisors, how does an investment bank go from bridesmaid to bride when a private equity fund decides to sell?  Please read on.

  1. Specialize. Private equity funds realize that an investment bank with focused industry experience will reduce the pain of the CIM & Management Presentation drafting processes and be able to quickly develop effective positioning strategy with a keen nose for the likely clearing valuation.  We also expect such a group to be well connected to the field of probable buyers.  If you advertise a specific industry vertical on your website with recent and numerous relevant closed transactions to the portfolio company in question you will be much more likely to make it onto the list when a PE firm starts to make calls.  And, on the topic of websites, it helps if you include the contact information of the bankers focusing on that vertical – it has never made sense to me why some groups hide such basic information from potential customers as names, phone numbers and email addresses.  Also, don’t presume that a fund has entrenched banking relationships that are all but promised certain mandates – we want to go with the best group for the job, and a recent transaction in the same sector as our portfolio company may be enough to win the mandate.
  2. Express Interest in Specific Portfolio Companies. The most unproductive meetings are with intermediaries who are ill-informed about portfolio companies and register a generic interest to help us sell them.  Conversely, a fantastic way rise to the top of a PE professional’s consciousness is to succinctly approach him or her with a simple email about a particular portfolio company and why you think your experience could be helpful in some capacity.  For instance, if you sell a business in the same industry, send a personalized email advertising the closing as opposed to an anonymous blast.  Similarly, if you are aware of executives that could serve as value-added board members or even members of the team, never hesitate to offer up an introduction.  We don’t claim to have a monopoly on good ideas and always value creative input about ways to enhance the value of our holdings.
  3. Develop Relationships Early in the Investment Cycle. By the time a fund starts thinking about exiting an investment, it’s possible that they already have their short list of potential advisors in mind, and it’s too late to get a shot at the mandate.  Play the long game, and make sure you are investing the time to build lasting relationships with funds that own companies that you think you may want to help sell one day.  As the saying goes, people want to do business with those that they know, like and trust, and the process of getting to that point can take time.  And, never underestimate the value of an in-person meeting.
  4. Consistent Communication. All of us, investors and advisors alike, are bombarded with so much information these days that sometimes it’s simply the last person that reached out to us that we remember.  Enhance the odds of being remembered by creating a regular cadence to your outreach.  If your communications are too sporadic then you run the risk of an advisor selection decision occurring in between touches that are too far apart. The investment banks that do it best set recurring 90-day calendar appointments which have the ancillary benefit of building deeper relationships.  If I can remember and ask you about non-business items specific to you (e.g. vacations, family, personal interests, etc.) without glancing at the CRM to recall our prior discussion, then you are doing a great job.
  5. Create Internal Advocates. A great way to do this is by forging a symbiotic relationship with a PE firm’s deal sourcing professional(s).  Through these connections, you will gain insights into portfolio companies in exchange for information regarding deals in your pipeline that will be coming to market.  Many times, the deal sourcing team will influence which investment banks are brought into a pitch, so it’s best to create strong alliances with these individuals while also getting their help in accessing other team members focused on portfolio company governance that you don’t already know.  As a general rule, the best way to ensure a healthy dialogue is to make sure new opportunities are being shown to the deal sourcing professional rather than going around them to try and impress what may be perceived to be the decision makers regarding banker selection.  If a PE fund has created a business development function, then they’ve signaled that they want new opportunities to flow through that team.  Best to help make them look good.
  6. Make Sure We’re Seeing All Deals Relevant to Our Investment Criteria. Whether the fund chooses to pursue a new deal or not, new deals are a fantastic way to advertise your firm and activity.  Also, it can sting if a fund sees an announcement about a successful closing for an opportunity they weren’t privy to.  This is another arena where a firm’s sourcing team can be helpful – if you are unsure about whether a fund should show up on the buyers list, reach out to your contact to have the conversation vs. making assumptions.  We want to hear from you.

To all our friends in the investment banking community, we hope these ideas are helpful and provide some transparency around our thought process.  We look forward to hearing from you and doing business together.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.  

The 3 Questions to Ask Someone Who Wants to Buy Your Business

There are lies, damned lies, and things people will tell you when they want to buy your business.

If you are a business owner or CEO, chances are that you’ve been approached more than a few times by someone expressing an interest to invest in or acquire your company.  In the off chance you have received a thoughtful, well-communicated inquiry about why this person is specifically reaching out to you, then before you pick up the phone to return the call, consider these three questions you will want to ask to better evaluate their intentions.

  1. Do you have the money to buy my business?

There are many flavors of investors in the mergers and acquisitions community.  Some have dedicated capital readily available to close transactions.  Others do not. Whether the person with whom you’re speaking has the capital or doesn’t can have implications for what to expect over the course of a transaction, so it’s important you know this from the outset by getting a clear answer to the question.

If there is any hesitation from the individual, then proceed with caution. Your time is too valuable to follow someone down a rabbit hole.  If the individual confirms that he or she has the money, then proceed to the next question.

  1. Where does the money come from?

Even though it might seem like a commodity, not all money is created equal.  Where the money comes from can affect what the investor can pay for your business, how the deal is structured and/or how long the person intends to be an investor in the company.  For instance, capital from a group of high net worth investors might value annual cash distributions over growing the bottom line.  Other sources of capital may seek a return in shorter or longer time horizons which can affect the timing of future changes in ownership.  Make sure you understand the true objectives of the capital source.

  1. Do you know anything about my industry?

If you get into deeper conversations about a transaction, you can expect the investor to want to conduct an evaluation of various attributes of your company. This is frequently referred to as “due diligence”.  An investor familiar with your industry will be able to hone in on the material issues without sweating the small stuff.  It will make your life a lot easier during the due diligence phase if more time is spent on the things that matter most.

These three questions are merely the starting point for the next time you get the call from someone who says they want to invest in or buy your business.  If you’re seriously considering an exit strategy or bringing in capital for growth, you also need to do your own due diligence in vetting the right capital partner. The right partner will want to ensure the deal is a win/win and will ensure the transaction is conducted with transparency and that you’re well informed along the way.


About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.