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January 29, 2024

Partnering with PE firms is a great way to exponentially grow a business and reach new heights. However, there are considerations that must be taken into account, before taking PE capital. Fully understanding them will increase chances of success, in the attempt to unlock the full potential of the business. In this article, Jason Mironov, Managing Director at TA Associates, discusses the pros and cons of taking PE capital. 

“There isn't a monopoly on good ideas or how to think about business. The best partnerships are the ones where you're learning from each other.” - Jason Mironov 

Pros of taking PE capital

There are a myriad of reasons why people ultimately take money from a private equity firm. Here are the most common ones:

  1. De-risking a person's individual investment - entrepreneurs who own 100 percent of their business may be more hesitant to take on real risk. Partnering with a private equity firm can help diversify and alleviate this. 
  1. Diversity of thought across the boardroom - there's real value in having people with a variety of experiences.
  1. Better understanding of success metrics - PE firms offer companies deep insights into success-driving metrics and benchmarks against comparable companies.
  1. Expanding the Network - It involves making introductions, calling potential customers, and extending the reach of the business far beyond what any one individual can do.
  1. Family - Partnering with someone who has skin in the game and is motivated by the individual success of the business is important. Having someone to relate to, talk honestly about the things happening inside the business, is a really healthy dynamic.

Cons of taking PE capital

While it is not necessarily considered as a disadvantage, one of the most difficult aspects of partnering with PE firms is the control over the business. Entrepreneurs who have been doing it alone for a while, are not used to having someone who tells them what to do. They need a transitional period to adapt to working with another sponsor who has a vested interest in the business.

Dilution for founders

According to Jason, partnering with a PE firm is much more capital efficient than venture capitalists. Over at TA, they do not provide primary capital, and only buy secondary shares from shareholders. This process doesn't result in the same kind of dilution as adding cash to the balance sheet. 

The key is growing a business to a point where it is profitable, as the valuation gains from doing a secondary transaction with PE firms can be significant. 

Choosing PE firms to partner with

When handling inbound calls from PE firms, the most important thing to do as the founder is figure out what the real goal is, and why consider partnering with PE firms. After that, filter the PE firms using these steps.

  1. Understand the institutional history of the firm - Who have they invested in? Do they understand the industry? Have they had experiences here? 
  2. Gather their ideas - What would they want to do with the sector or segment? What's their general thesis around what they're doing? 
  3. Know their network - Who is in their network that can be helpful? Are there introductions they can make to potential customers?
  4. Do your own diligence - Most private equity firms have their companies listed on their website. Contact people who are part of that portfolio to find out who the right person is and what sectors they spend time in.
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