Private Equity Funds
When a funding request is $50 million, or more, an option for funding these transactions is through Private Equity Funds. These funds are a pooling of money from a number of
individual Accredited Investors and investment firms. The
transactions are often handled by an Investment Banker who can be
an individual, or firm, specializing in raising capital, financing business transactions, and managing corporate mergers and acquisitions by selling new securities, and/or underwriting the
In the past using Private Equity Funds as a source for funding large deals was a great alternative – whether funding $100 million, $1 billion, or more. For the past four years there has been an average of $500 billion/year invested by investment firms offering Private Equity Funding. However, it has been reported that since June 22, 2007 an estimated $60 billion of transactions have already been knocked off the funding table. The funding is drying up because investors don’t like the uncertainty of the current market conditions. It is expected that credit will continue to tighten making it more difficult for up coming deals to get funded.
This credit tightening is a direct result of the sub-prime mortgage mess. Everyone has seen the news about sub-prime lending for home mortgages. What everyone doesn’t see is the toll that the sub-prime mortgage situation is taking on aspects of business funding. Many investment companies have huge amounts of capital tied up in the mortgage markets. The current credit crunch will make it difficult for these investors to unwind their billions of dollars that is invested in this market.
For the past several years Private Equity Firms have invested at a fairly aggressive pace, but the mortgage situation has resulted with pulling in the reins of investment. There is uncertainty, which causes volatility and a weakening of the market. Fewer Accredited Investors willing to take the risk, or having the access to their capital, which is tied up in sub-primes, is keeping Private Equity Funds from having the ability to move forward with new investments.
Worldwide - investors and transactions have felt the credit squeeze. Until the mortgage sector is stabilized, it
will be difficult for Investment Bankers to convince their
Accredited Investors to invest in the Private Equity Funds that are a
major source of funding the larger funding
When investing in large transactions, investors will have an exit strategy. Typically investors look at getting out of the investment and taking their profits in 3-5 years. Private Equity Funds are still an effective funding vehicle when investors who are presented with sound transactions, which are taking a longer-term approach to investing, possibly up to 10 years.
Transactions that involve a company with a long track record where the past performance can be analyzed have
much better chance than transactions that are solely based on perfomas.
We recently had a large transaction cross our desk where the initial information provided many aspects that were very positive and intriguing, but the client would only allow a Funding Source 7-days to complete Due Diligence. This was an obvious red flag. What were they hiding? Understand that no one in the market is going to fund $50 million, $100 million, or more on a shaky deal, or when the investor doesn’t have the opportunity to prove that transaction makes sound financial reasoning. These deals won’t get funded on sales hype.
A positive effect of the current capital situation - with fewer investors in the market place willing to take a risk, companies looking for acquisitions will find some attractive deals.
Don’t miss out on commissions by hesitating to pursue smaller deals that meet SBA business loan criteria.
Examples of current SBA transactions:
Private School, special use property - funded $1,900,000 million (85% financing)
Convention Center - funded $1,250,000 (85% financing)
Gas Station – funded $362,000 (real estate, working capital, closing costs)
Franchise – funded $1,075,000 (franchise, equipment, working capital)
Company acquisition – funded $815,000 ( assets, working capital)
Pharmacy – funded $1,985,000 (real estate and assets)
Pharmacy – funded $1,900,000 (business assets with lien against personal residence)
Pharmacy – funded $975,000 (business assets with lien against personal residence)
Pharmacy – funded $742,000 (business assets with lien against personal residence)
Pharmacy – funded $1,680,000 (business assets with lien against personal residence)