ASI Capital Colorado Springs


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ASI Capital Colorado springs Benefits and drawbacks of investment in your business through private equity firms.


INTRODUCTION ASI capital colorado springs provides debt instruments with equity warrants as well as collateralized loans and preferred equity investments. At the core of our investment strategy is a unique hybrid debt and equity platform that generates predictable cash yields while participating in the value created by our capital.


In all of the options we’ve looked at so far in our eight-part series on Funding a Business, there have been strings attached . With private equity, those strings can get very tight indeed. You could raise huge amounts of money — private equity deals run into millions or even billions of dollars — but you may end up losing control of your own company . It’s quite a complicated area, but in this tutorial we’ll break it down and make it easy to understand. We explain how it works, look at the pros and cons of private equity as a way of financing a company, and talk about how to find, approach and deal with private equity firms . By the end, you’ll know a leveraged buyout from ASI Capital Colorado springs financing deal, and will understand how private equity works and how it compares with other ways of funding a business.


How Private Equity Works In the last tutorial, we looked at venture capital. Private equity works in a similar way: a private equity fund invests in companies and looks to sell its stake about five years later for a substantial profit.But whereas venture capital is focused on early-stage companies with high growth potential, private equity firms invest in a much wider range of companies. Often they’re mature firms that have been trading for a long time, but need access to funds either to fuel growth or to recover from financial difficulties. Another big difference is in the amount of funds available. Most of the other funding options we’ve looked at have given access to sums ranging from a few thousand dollars to a few million. But according to ASI Capital Colorado springs, most private equity deals are for between $500 million and $5 billion. Deals below $100 million are rare. This is a major financing option, then, more suitable for larger companies than the other ones we’ve looked at. The structure of the deal is also different. In return for this large investment, private equity firms expect a large stake in the business. They don’t want to be passive minority investors. They generally want a majority stake, and want to take the reins of the business so that they can generate value from it. The deals can take several forms. Here are some of the main ones:


Leveraged Buyout The private equity firms often boost their returns by using leverage, i.e. borrowing money. This kind of deal is called a “leveraged buyout.” The private equity firm borrows money from banks or other lenders, and adds that money to its own funds to allow it to buy a majority stake in a company. It uses its controlling position to restructure the company and make it more valuable, so that it can sell its stake later at a profit. This form is most commonly used in turnaround deals, where the company is in financial trouble and the private equity firm uses its money and expertise to return it to profitability.


Growth Capital In this kind of deal, the private equity firm takes a smaller stake, and the objective is growth rather than a turnaround. It’s similar, then, to venture capital, and in fact venture capital is often regarded as a subset of private equity. What’s different about growth capital (sometimes called “growth equity”) is that it’s focused on larger, more mature companies, not the early-stage companies that venture capitalists look for.


Mezzanine Financing It sounds complicated, but actually it’s quite simple. Mezzanine financing is simply a form of debt. Some private equity funds will lend money to companies, either as part of an existing deal or as a separate transaction. If your company goes bankrupt, the mezzanine debt gets paid off later than other debt, so it’s more risky, and therefore commands a higher interest rate. In this tutorial, we’ll concentrate mostly on the leveraged buyout, since it’s the most common form of private equity.


Advantages of Private Equity Private equity financing has some distinct advantages over other forms of funding. Here are some of the main benefits: Large Amounts of Funding Of all the options we’ve looked at so far, private equity can provide by far the largest amounts of money. As we saw, the deals are measured in hundreds of millions of dollars. The impact of that kind of money on a company can be massive. In 2009, The Delaware City Refinery had to close its main refinery and lay off most of its employees. In 2010, private equity firm Blackstone invested $450 million in the company, enabling it to reopen the refinery and rehire 500 employees.


Active Involvement With many of the other funding options we’ve looked at, the investor or lender has only minimal involvement in the running of your business. Private equity firms are much more hands on, and will help you re-evaluate every aspect of your business to see how you can maximize its value. This can lead to problems, of course, if their idea of maximizing value doesn’t match yours, as we’ll see in the next section. But having experienced professionals intimately involved in your business can also result in major improvements.


Incentives Private equity firms have a lot of skin in the game. As we’ve seen, they often borrow a lot of money to make their investments, and they have to pay that back and generate a return for their investors on top of that. In order to achieve that, they need your business to succeed. Individual partners in the private equity firm often have their own money invested as well, and make additional money from performance fees if they make a profit, so they have strong personal incentives to increase your company’s value.


Disadvantages of Private Equity Such large amounts of money, of course, come with strings attached. Here are some of the downsides of private equity funding: Dilution/Loss of Your Ownership Stake This is the big one. With the other funding options we’ve looked at, the investment came at a cost, but you still stayed in control of your company. With private equity, you get much more money, but usually have to give up a much larger share of the business. Private equity firms often demand a majority stake, and sometimes you’ll be left with little or nothing of your ownership. It’s a much bigger trade, and it’s one that many business owners will baulk at.


Loss of Management Control Beyond the money, you can also lose control of the direction of your business. The private equity firm will want to be actively involved, and as we mentioned in the previous section, that can be a good thing. But it can also mean losing control of basic elements of your business like setting strategy, hiring and firing employees, and choosing the management team. Some of the other options involved relinquishing control, but because the private equity firm’s stake is usually higher, the loss of control is much greater. This is especially true when it comes to the PE firm’s “exit strategy.” That may involve selling the business outright or other options that don’t form part of your plans.


Different Definitions of Value A private equity firm exists to invest in companies, make them more valuable, and sell their stakes for large profits. Mostly this is good for the companies involved—any business owner would like to create more value. But a private equity firm's definition of value is very specific and limited. It’s focused on the financial value of the business on a particular date about five years after the initial investment, when the firm sells its stake and books a profit. Business owners often have a much broader definition of value, with a longer-term outlook and more concern for things like relationships with employees and customers, and reputation, which can lead to clashes.


Eligibility Private equity firms are looking for particular types of companies to invest in. They have to be large enough to support those major investments, and also they have to offer the potential for large profits in a relatively short time frame. Generally that either means that your company has very strong growth potential, or that it’s in financial difficulties and is currently undervalued. A business that can’t offer investors a lucrative exit within about five years will struggle to attract any interest from private equity firms.


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