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| The Tables Have Turned: Private Equity |
The Public Eye
Eileen P. Gunn
08/01/2005
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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.
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