When it comes to deciding whether or not to add a company to one of their funds, private equity firms must consider a multitude of factors. According to Mark Hauser, co-managing partner at Hauser Private Equity, these are the parameters that are typically looked at by private equity firms when looking for companies to invest in.
Private equity firms are more likely to invest in companies that reside in non-cyclical industries such as healthcare, utilities and consumer staples. Firms like Mark Hauser’s are looking for stable companies to make a long-term investment in, and those in cyclical industries such as travel are considered much more volatile as they are less likely to continue performing well in the event of an economic downturn.
Regardless of the industry, when looking at a target company private equity firms must confirm that it holds a strong position within its market. It must already have proven its ability to be a leader within its sector with competitive advantages, whether that be an innovative product or a strong business model. Private equity firms seek businesses with a proven track record of success that are poised for further growth.
Additionally, a business will be more attractive if it presents multiple opportunities for growth. Two heads are better than one, and differentiated revenue streams present a lower risk for private equity investors. Private equity firms help companies expand through operational support and restructuring, not by providing them with ideas for new locations or markets. Mark Hauser says investors want to see a company that has already taken this into consideration and is already aggressive in their pursuit of new business.
Along the same vein, a target company will be a better contender for investment if it does not require large amounts of capital in order to achieve growth. While it may make sense for venture capital investors to place their support behind new companies and start-ups that require multiple cash infusions, they are too high-risk for a typical private equity investment.
Businesses that have provided a comprehensive SWOT (strengths, weaknesses, opportunities and threats) analysis will be one step ahead of the game in receiving a private equity investment. So long as their findings are backed up in the due diligence portion of an acquisition, companies that have a strong vision for where they are going will be strong candidates, says Mark Hauser.
Being part of a private equity fund means you will receive capital and operational support, not that the business will be run for you. While the firm managing the fund may place a partner on the board or do some restructuring, it is more common for them to invest in companies that already have an impressive management team in place who will utilize their investment and expertise wisely.
Although private equity firms typically shy away from investing in sectors that are more volatile, as technology becomes more pervasive it has become increasingly more important for businesses to have a good understanding of their positioning in terms of research and development. Mark Hauser believes that a research and development plan should be ongoing and evolve as the company does.