Private Equity Fund Formation
- Preparation and negotiation of offering and LLC documentation
- Due diligence on prospective fund managers and negotiation of compensation with prospective managers
- Fund raising and marketing with institutional and individual investors
Private Equity Transactions
- Sourcing leads, often with other private equity investors
- Due diligence on companies, management team and boards of directors
- Financial analysis of companies, markets and competitors
- Negotiating with company officials and other investors
- On site audits of companies’ manufacturing / delivery capabilities
- Participate in professionalizing management, focusing on governance
- Exiting through ordinary course, liquidation or sale
Our experience is with growing low to medium technology manufacturing companies in the growth stage.
We have strong skills in protecting the downside as we began private equity careers working with investments in distressed portfolio companies. In addition, we have hands-on experience investing in private companies in numerous industries and stages, investing in private equity funds with diverse investment strategies, and investing in commercial real estate.
Further, we have led due diligence reviews of hundreds of private equity managers and of private companies. We have restructured equity and subordinated debt instruments to provide measured returns of capital. We have been involved in all stages of private equity fund formation from fund raising through negotiating agreements.
We can provide examples from the $100 million distressed portfolio resolved as an institution’s Chief Liquidation Officer, a breakout of the $1.77 billion invested as an institution’s Chief Investment Officer, and engagements through CGS Financial Services, LLC, to establish three private equity funds, a hedge fund and a boutique investment banking firm, and examples of deals reviewed and made.
Private Equity Philosophy
Valuation based on various methodologies will establish pricing:
We firstly focus on hard asset values to protect the downside. For example, in the oversight of a manufacturer of hardened enclosures for electronic cards for HDSL and ADSL service, we prepared a “downside analysis” based on the value of the manufacturing plant and other hard assets, with both a “going concern” valuation and a “forced liquidation” valuation , which assisted in a follow-on round of equity.
We are practiced with the comparables method. For example, in our analysis for the potential acquisition of a mobile office sales and leasing company, we obtained all publicly available information on the company, its competitors and market, the cost of buying and of refurbishing its mobile office fleet, and obtained information on the major competitors, and based on their more established values, deducted value from the target company based on size, fleet, financial strength and other material factors, ultimately recommending against acquisition due to age of mobile offices in the fleet and its competition.
Free Cash Flow
Valuation based on Free Cash Flow methodologies is formulaic and a necessary component to the overall pricing. The method and formula applied depends on numerous factors, most notably the stage of the company, whether:
“high growth phase” (over e.g. 5 years) with a 35% growth rate, a 30% growth capital spending, depreciation and revenues, a 15% working capital to revenues rate, and a higher beta (e.g., 1.20), amongst other factors,
“transition phase” (over e.g. 5 years) with a growth rate smoothing from 35% to 12%, a 10% growth in capital spending and depreciation, a 15% revenue growth, a 15% working capital to revenues rate, and a smoothing beta (e.g., 1.20 to 1.00), or
“stable growth phases” (over e.g. 5 years) with a stable 12% growth rate, capital expenditures offset by depreciation, a 12% revenue growth, a 15% working capital to revenues rate, and stable beta (e.g., 1.00), amongst other factors.
We used the Free Cash Flow method in conjunction with the “comparables” method investing in a “play or pay” round to prevent 100% dilution of a preferred stock position (4% of the ownership) acquired in a New Jersey software-design firm. A final sale resulted in a return of 123% based on cost.
Monitoring & Liquidation
On Site Audits, Hiring and Turnaround
We have organized and led on-site due diligence and audits in order to monitor companies’ compliance in meeting financial and fiduciary duties. This has been an essential part of analysis in performing workout and liquidation activities of acquired P/E investments, performing post-investment oversight of P/E firms, or in GP roles in fund formation, investment sourcing and oversight.
Our philosophy of hiring and managing individuals (on staff or in portfolio companies) is to hire and promote first on the basis of integrity; second, motivation; third, capacity; fourth, understanding; fifth, knowledge; and, last and least, experience. Without integrity, motivation is dangerous; without motivation, capacity is impotent; without capacity, understanding is limited; without understanding, knowledge is meaningless; without knowledge; experience is blind. Experience is easy to provide and quickly put to good use by people with the other qualities.
We have led numerous workouts, and have brought this practical hands-on experience to bear in various transactions. A turnaround formula utilized with a number of P/E investments liquidated was to first cut operating costs, so that break-even could be achieved at the lowest thinkable level of sales, invested money to grow sales, and then to keep fixed operating costs at the cut level for as long as possible. Growth thereafter was incremental and measured. For example, in restructuring debt instruments in a California company that produced “high-tech” chemical fertilizers, we restructured the loan as preferred stock, with a monthly redemption feature, based in part on the success of the company, set over five years and consistent with harvests. The company followed the above described turnaround formula and redemption ultimately returned substantially all of the original investment acquired and a return of 96% based on cost.
We have participated in professionalizing management, focusing on governance, and have served on boards in different capacities.
We have led and participated materially in the sale of P/E interests and companies in the normal course or in the liquidation of company or its assets.