Eileen P. Gunn
08/01/2005
Middle-market private equity firms generally look to buy companies that have $20 million to $200 million in revenue and then try to grow them over three to seven years to the point where they are valued at $200 million to $400 million. Unfortunately, that is still not large enough for a company to make a splash in the public markets today.
“You need a market cap of $500 million to get any attention from Wall Street, plus there is the cost of being public,” notes private equity investor Patrick Haden. “We used to take companies public that were much smaller than that.” With Sarbanes-Oxley raising the bar and investors favoring established blue chips, many private equity firms have had to find new exit strategies.
One popular approach is to up-sell the company to a bigger
private equity firm. “Maybe a Goldman Sachs will buy a $300 million company that
it didn’t want to buy when it was a $75 million company,” Haden says.Being handed from one private investor to another can have advantages for entrepreneurs and family business owners. The alternatives—going public or being acquired in a windfall strategic transaction—may seem glamorous, but either route usually leads to a dramatic change in the company’s culture and ways of doing business, something many owners dread. Owners who have remained in charge in partnership with a private equity investor often wind up stepping aside to make room for a CEO with experience at a public company, or, with strategic acquisitions, they let the acquiring company’s managers take over.
All but one of the business owners interviewed for this article doubted their company would go public. “I don’t think the IPO is a strategy that we’ll pursue. There are probably other events that would make more sense—possibly another private equity firm or a strategic buyer,” says Michael Halberda of Healthcare Management Solutions.
The possibility of being able to keep the company private and independent for a few more years clearly makes the idea of bringing in an outside investor more palatable to business owners. But the public markets are still the main route of capitalism, says Andy Mack, the CEO of Teavana, a chain of upscale tea stores based in Atlanta, who sees the possibility of an IPO in his company’s leaves.
Those who hope to live under the aegis of private investors for a long stretch may be disappointed. Tough accounting regulations can be reformed. Investors can grow tired of big, lumbering blue chips and rediscover small stocks. If market conditions change abruptly, those business owners who accept private equity could face their day of reckoning sooner than expected.
Back to Main Article: The Tables Have Turned: Private Equity