This Nixon Peabody blog addresses the growing trend of middle market private equity firms seeking outside investors in the firms themselves – as opposed to their fund vehicles. The major reasons for this trend include meeting the firms’ needs for growth capital, facilitating generational transfers, and deepening ties with existing fund investors.
The first two reasons for seeking outside capital could apply to companies in any industry – but the idea of seeking out capital in order to deepen ties with fund investors is unique to the fund business. Here’s an excerpt discussing how selling minority interests in the firm can enhance relations with fund investors:
Historically, minority investors in private equity firms have been current or former fund limited partners. Selling a minority stake in the firm to a long-time fund limited partner allows both the private equity firm and the limited partner to develop a deeper institutional tie. Private equity firms look for minority investors with industry expertise, deal sourcing networks and value beyond their capital.
Limited partners are attracted to minority investments in private equity firms because their investment maintains a steady stream of income from profits and distributions and avoids the fees associated with investments at the fund level. Becoming a minority investor at the firm level could also open up additional investment opportunities at the fund level.
The blog points out that – unlike fund investments – capital invested at the firm level may be tied up indefinitely without an express commitment to a future liquidity event.
– John Jenkins