Seven types of private equity investors
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Selling a company
An important question for any entrepreneur considering selling their business: who do you want to sell to? In a previous article, we discussed five different types of buyers, each with unique characteristics and traits. The private equity (PE) investors are an important category. This type of investor buys a company with the intention of selling it again after five to seven years, with the aim of achieving the highest possible return.
Carefully choose your type of PE investors
Within the PE market, there are considerable differences between the various types of private equity investors. While some parties actively contribute ideas and offer support within the company, others are only interested in the annual management fee and the return on exit. It is therefore essential to carefully choose the type of investor you want to work with, depending on your goals and wishes. An article was published in the Financieel Dagblad (FD) highlighting seven types of PE investors.[1] These are discussed in more detail below, sorted by the degree of influence they exert on the company:
[1] FD – De kralenrijger en zes andere types in private equity
The Business Doctor
These private equity investors focus on poorly performing but viable companies. Through smart cost savings and improvements in business operations, the Business Doctor is able to transform these companies, which can often be acquired at low prices, and make them profitable, leading to high returns.
The Bead Stringer
Bead stringers employ a so-called ‘buy and build’ strategy. By acquiring and bundling multiple companies within a sector, economies of scale and synergies can be realized, leading to cost savings and therefore higher returns. In addition, acquiring and bundling companies offers opportunities for ‘multiple arbitrage’. Multiple arbitrage in private equity is a powerful strategy whereby the value of a company is increased by taking advantage of different valuation multiples at the time of purchase and sale. This process often involves acquiring a company with a lower multiple, adding value through strategic acquisitions, operational improvements, or synergies, and then selling it at a higher multiple. This method can generate significant profits for PE investors without the need for fundamental changes in business operations.
The Specialist
These PE investors focus on one specific sector, with the motto: “Better to be very good at one thing than reasonably good at several things.” The specialist has in-depth knowledge of the market and responds to niche opportunities.
The Stayer
The Stayer invests for the long term, in contrast to the traditional PE strategy of selling within five to seven years. The Stayer often works with family capital, which offers the flexibility to hold investments for longer without having to realize quick returns.
The Coach
This investor offers companies support as a ‘coach’ without taking on the role of director. The Coach provides strategic advice, for example on acquisitions or business optimization, but does not make operational decisions.
The Newcomer
Newcomers are often former employees of larger PE firms who have struck out on their own. Although the Newcomer wants to capitalize on his or her experience in their own company, in practice it often proves more difficult to be successful without the support of established networks.
The Mega-Investor
These private equity investors are the ‘big boys’ in the PE world, such as Blackstone, which exceeded the $1 trillion mark in assets under management (Dutch economy = ± €1 trillion). With enormous amounts under management, these investors already earn a lot from the annual management fee of 2%. The Mega Investor generally shows little interest in SMEs.
Conclusion
There are significant differences between the types of private equity investors, ranging from strategies to sectors in which they operate. Which investor is the best suit for you depends on your own ambitions and the needs of your company. Are you looking for a strategic partner for advice, or are you primarily looking for a capital injection? At BrightOrange, we help you find the perfect match with the right PE investors. Feel free to contact us for a consultation.
