What are private equity looking for?

Private equity are looking for:

Business

  • Led by a high quality management team.
  • Established business plan.
  • Growth strategy through organic or buy and build.
  • Growth opportunities in the business sector.
  • Niche or defendable market positions.
  • Barriers to entry.
  • Intellectual property.
  • Cash generative.

Exit

Private equity typically look for an exit between three and five years, however, some funds can be up to 10 years.

Ultimately the management will decide when the moment is right for an exit and there is no minimum period the private equity house are required to hold their investments.

On an exit private equity require a clean exit with no warranties given by the private equity houses.

Types of exit

  • Strategic trade sale
  • Secondary private equity funding
  • Stock exchange listing

Returns

Private equity aim to get a return of 30% internal rate of return and 2.5x to 3x money multiple return on initial investment.

Costs

  • Loan note interest (paid verses rolled up interest)
  • Annual monitoring fee
  • Arrangement fee (percentage of equity cheque)
  • Chairman fees

Further reading