Private equity is long-term equity financing provided to unquoted (i.e., private) companies. As an asset class, private equity has existed since the 1980s and is now an important feature of most established-market economies. It is also playing an increasingly significant role in many rapidly developing economies.
In 2007, private equity and venture capital firms invested over $190 billion in some 13,000 companies across the U.S. and Europe, according to Thomson Financial and the European Private Equity & Venture Capital Association. Studies show that between 2000 and 2004 European private equity and venture capital-backed companies created 1 million new jobs, which translates to a compound annual growth rate of 5.4% per year (eight times the EU25 total employment rate of 0.7%).
In Latin America, private equity firms invested more than $14 billion in 400 companies from 2003 to 2007, according to industry newsletter Venture Equity Latin America (VELA). In terms of job growth, the International Finance Corporation (IFC) has invested in over 100 private equity funds in developing markets representing an active portfolio of 480 companies worldwide. IFC reports that these companies generated 13.7% employment growth from 1998 to 2006, compared with 1.6% growth for their regions. Latin American and Caribbean companies in the portfolio saw an 8.0% increase in jobs compared with 2.4% for the region.
For more information on private equity, visit these websites:
Mexican Private Equity Association
Latin American Venture Capital Association
Emerging Markets Private Equity Association
Private Equity Council
European Private Equity & Venture Capital Association
How does private equity differ from venture capital?
Industry terminology varies, but it is a widely accepted norm that the term “private equity” refers to later-stage investments in already established businesses. These investments are sometimes referred to generally as “buyouts.” “Venture capital” typically refers to earlier-stage investments in companies that require expansion capital. Advent International focuses on mid-sized buyouts (enterprise values between $50 million and $750 million in Latin America) and does not make venture capital investments.
How does private equity differ from other forms of financing, such as bank debt, hedge funds or initial public offering of stock?
In simple terms, private equity firms take a medium-term shareholding in a business with the objective of significantly enhancing its value within a three- to six-year time frame. They also play an active role in the management and development of the company during that time.
Private equity differs in two main ways from other forms of financing:
• Private equity firms purchase equity in a business.
• Debt financing, typically from a bank, is a loan that has to be repaid with interest.
• Initial public offerings, or IPOs, raise capital from a public investor base, which has a much shorter-term view on financial returns. Public markets like predictability of earnings and are less sympathetic to large-scale operational expenditure which, although in the long-term interest of the business, might depress short-term earnings. Because private equity firms typically invest in a business for three to six years, they take a longer-term view on value creation. Large-scale operational expenditure is precisely the type of cost that private equity investors routinely commit to when backing a company, enabling the business to achieve clearly defined growth targets.
• Hedge funds. A hedge fund is similar to private equity in that it typically raises capital from sophisticated, professional investors. But that is where the similarity ends. Private equity firms typically buy and own whole companies and seek to create value over the long term by helping them grow earnings. Conversely, hedge funds are primarily interested in liquidity and therefore have a much shorter time horizon. Their typical holding period is weeks or months, not years. For this reason, hedge funds generally invest only in public companies, typically taking a minority stake. Unlike private equity, they do not play an active role in the oversight or development of companies.
Active ownership: Unlike banks, hedge funds or public shareholders, private equity investors play an active role in the management and development of the companies they own. Typical activities include: developing and supporting a growth strategy; professionalizing a company; offering support to management on strategy and policy; providing management expertise and acting as a sounding board for management ideas; facilitating networking opportunities and industry connections; managing or driving projects such as entering new markets or executing an acquisition program.
Where do private equity firms get their money to buy companies?
Private equity firms raise pools of capital from sophisticated, professional investors such as public and corporate pension funds, funds of funds, insurance companies, foundations and endowments, universities and private individuals. Find out more about Advent’s investors
These investors regard private equity as an asset class from which they can generate a return on their capital. Other asset classes in which they might typically invest are public equities (stocks), fixed income (bonds), cash equivalents (money market instruments) and real estate.
As a business owner, why should I consider selling to Advent?
For owners or founder-shareholders who have an interest in seeing the continued growth of their business as an independent entity, private equity offers a good solution. Many owners are also attracted by the fact that a private equity investor is an experienced, like-minded shareholder who is committed to taking a business to the next level, rather than simply acquiring its customer base, market share or assets. Many owners also like to consider the future interests of their management team, whose members will have made a significant contribution to the successful development of the business. Private equity firms typically provide incentives to existing management teams when they acquire a business, enabling them to participate in its continued success.
Does Advent typically take a minority or majority ownership position in companies?
Advent most commonly takes a majority shareholding in a company but will also consider, in very select and extraordinary cases, minority ownership where we are working with like-minded shareholders.
Does the seller typically retain any ownership in the company after Advent invests?
In most cases, private sellers retain a significant shareholding in the business. However, there are some situations where they take advantage of the liquidity event and monetize their investment.
What happens to the management teams of companies in which Advent invests?
Our philosophy is one of backing management teams. In most cases, the original management team, or core members of the team, will stay with the business. However, given that our portfolio companies are often striving to meet ambitious growth targets, we do sometimes have the requirement for additional, complementary management expertise. This can be introduced in a variety of ways, including executive and non-executive appointments and through the involvement of specialist industry advisers from our Operating Partner program
Can the management team invest in the company alongside Advent or, if they already own an equity interest, retain partial ownership?
Yes. It is Advent’s philosophy to align the management team’s interests with our own. Hence we like to be able to offer equity participation to management.
In addition to equity, does Advent use external debt, or leverage, to finance its investments?
Yes, but it depends on the situation. Our track record is a mix of buyouts, recapitalizations and growth equity investments. Some investments are funded exclusively with equity and have no debt, while others use leverage appropriate for the transaction. We generally take a conservative approach to leverage that is compatible with each portfolio company’s capacity to sustain a prudent level of debt. In addition, we believe that our debt levels for buyouts and recapitalizations are below industry averages because of the higher-growth nature of our portfolios.
How does the investment decision-making process work?
All stages of the investment decision-making process are conducted in the strictest confidence and with appropriate sensitivity and discretion.
The process begins with the initial screening of an opportunity. In the business plan, we like to see a description of the market opportunity, what differentiates the product or service you are offering, the historical and projected financial statements for the business (including capital structure), management qualifications, marketing and sales strategy, and the expected use of financing proceeds.
After the initial review, the next step involves meetings with your company's management, enabling us to get to know each other and discuss the business in greater depth.
The decision to invest is made by a regional investment committee. Having made over 575 investments, we are very experienced at executing transactions quickly and efficiently, and this is always our aim.
What it is like to work with Advent? How much involvement will you have with the business?
We are an active investor who likes to establish a collaborative partnership with management teams. We typically sit on the company’s board and are closely involved in overseeing strategy. We also pay particular attention to financial reporting. We do not, however, get involved in the day-to-day operations of the business, which is the core expertise of the management team.
How does Advent help to develop companies?
Advent helps develop companies in multiple ways. First, we commit capital. Second, we bring to bear our in-depth sector knowledge and often first-hand experience working with companies in similar situations. Through our extensive international networks we are also able to offer companies access to market intelligence, industry experts and general contacts that might otherwise be difficult to attain. Additionally, we can assist with activities such as international expansion, cross-border transactions, offshore manufacturing, business alliances, technology and product sourcing, channel development, acquisitions and divestitures.
What advantages does Advent have over other private equity firms?
• Depth of sector expertise: Many private equity firms adopt a specialist sector focus, but few have been involved in their sectors for as long as we have (over two decades in most cases) or have such an international perspective on their chosen sectors. Our investments within any particular sector often span four continents.
• Local market knowledge: Local market knowledge is imperative to helping companies achieve their full growth potential, whether at a domestic, regional or international level. Having an established local presence is at the heart of Advent’s philosophy, and our network of offices – each of which has an established team of local nationals – is unrivalled both regionally and globally.
• International networks: Today, all businesses are affected to one degree or another by globalization. The result is enhanced opportunity, but also increased threats. International best practice is now a necessity for all companies. With our unrivalled combination of global reach and local, on-the-ground resources, Advent’s international networks provide an invaluable source of support to portfolio companies.
• Track record: Spanning multiple sectors and geographies, and established over two decades, Advent’s track record is the most powerful evidence of how successful we are in helping our portfolio companies to develop. More broadly, we are widely recognized as one of the industry’s most influential global private equity investors. This is reinforced by over 20 industry firsts and multiple awards across all the regions in which we invest.
How long does Advent remain an investor in a company?
This depends on the development of the company concerned, but our typical investment period is three to six years.
How does Advent realize, or exit, its investments?
The exit decision is made in conjunction with the company's management team, board and other shareholders. Which route is chosen is determined by the individual and market circumstances of the company involved. The most common exit route is a sale to a strategic buyer ("trade sale"), although we may also consider an initial public offering ("IPO) of stock on a local or international exchange if the business exhibits the right growth characteristics. In some circumstances, we may sell the business to another private equity firm.