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M&A Investors: Common Types of Private Equity (PE) Firms

A private equity (PE) firm is a pool of money looking to invest in or to buy companies. Not all PE firms in the M&A business are the same. The following will clue you in on a few common types of PE firms.

Traditional (buy and sell)

A traditional PE firm wants to make an acquisition and perhaps fix up the company by streamlining operation, cutting wasteful spending, increasing sales, and maybe making some add-on acquisitions, all on a three- to five-year timeline. The traditional PE firm finances transactions by putting in as little of its own money as possible.

Traditional PE firms need to eventually sell their portfolio companies. This sale is called a “liquidity event.” Why? Because the firm is taking an illiquid asset (ownership in the company) and exchanging that ownership for some sort of equivalent store of value, commonly called money.

Although PE firms talk about holding their investments for a few years, in reality, all their portfolio companies are for sale at all times, for the right price. The GPs love to brag about their return rates, so an early sale with a great return is fine by them.

Family office (long-term holders)

These firms work in a similar fashion to traditional PE firms, except the money usually comes from one or an extremely limited number of LPs. Most often, the LP is an extremely wealthy family that set up an office to manage a portion of the family’s wealth.

Family offices are usually long-term holders of their portfolio companies. In fact, the term is so long that these entities are often called buy and hold.

If you ask the typical executive at a family office when the firm expects to sell a portfolio company, the typical answer is a curt, “Never.” For this reason, a family office can make an idea financial partner for a Seller who is concerned about the company being bought and then rapidly flipped or otherwise dismantled.

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