Your Private Equity Playbook

$3.9 trillion of assets were held by Private Equity Firms in 2019.

I had a phone call with a friend working at a Private Equity Fund the other night. He said,

“Look, Bridger. Private Equity doesn’t need to be this big flashy ordeal that makes the front page of the WSJ. PE can be simple & discrete… and still make you tons of money.”

Here’s the private equity playbook:

As in all funds – you start with the deal.

You find a business, or a group of businesses that you can scale. Once you have identified that business the next step is to work out the finances and structuring. 

Take Note: Private Equity firms work closely with lenders – which can be large banks and institutions…

However, more commonly seen are PE firms that work with a different funds or entities that specializes in these short term lending facilities. 

The most common approach is to buy 80% of a business. You let the management team keep the rest of equity. Most firms want to keep the management team in place – or just replace 1 or 2 key players that they think will be a game changer for the business.

You let the management team keep 20% to incentivize them. 

The Process

Most PE businesses will have a 10 year lockup period on capital they raise.

YOUR GOAL: Identify & acquire ‘X’ number of businesses in the first 5 years. And then build and scale those businesses and exit before year 10. 

The target hold in PE is usually 3 – 7  years. The longer you hold onto a business – the harder it is to provide consistent & strong Internal Rate of Return (IRR).

Pro tip: Remember that any dollar you raise, needs to be at work – otherwise you are just lowering your IRR for the fund and in turn, to your investors.

That is why it is so important to raise the right amount of capital!

You shouldn’t just pick a random number that you think will fit. You need to align your capacity with your capital.

Example: If you are a two man team – do you really think you will be able to buy, manage, & grow 10 businesses over the next 5 years? PROBABLY NOT.

Most PE firms play a very active role in their portfolio companies. They are meeting with them on a daily, weekly, or monthly basis; understanding the needs of the business and how they can continually add value. 

Private Equity is hands on. You are working alongside business owners to help them grow their business. 

The Exit Strategy

Once you have 2X – 3X’ed the business then it is time to make an exit.

Most PE firms will sell to one of the two following: 

  1. They will sell to a larger PE firm. PE firms like to take care of their own. Small PE firms will groom businesses for larger ones – and they will keep passing the business up the ladder until {if all goes well} an IPO.
  2. They will seek out larger buyers. On a macro level, we are seeing industries consolidate in 2 – 4 large entities that dominate their sector. Before even making the initial acquisition, PE firms will identify 3 or 4 buyers that could benefit from a sale.

They will even go as far as getting soft commitments from larger companies(future buyers), saying something like 

“If we were to scale this business to XXX level…. How interested would you be in the deal?” “What traits would you like to see in a business before you acquire it?”

At that point- these large companies are just preparing themselves to buy from you. If you are able to come back in a few years and say,

“Hey – you said you would be interested in a business with “XXX” characteristics – here you go.” 

Of course – that doesn’t guarantee an exit – but it certainly improves the likelihood of a successful exit. Just be prudent!

These are not the only two exit routes – but they are the most common by far. 

Similar to syndicating real estate – if you don’t have the experience or expertise yet – then a “Fundless Sponsor” is the way to go. 

This is where you identify a company – raise the money – and YOU step in as the “CEO” of sorts – scale the business – exit with a portion of the sale. 

And there you have it, guys! A {brief} playbook for Private Equity.

However, there’s still so much to learn! In my course I go through every step of this process. If you’re interested, let me know.

Thanks for the read!

Bridger Pennington


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