Alternatives to Traditional Equity Financing When Raising Capital
While publicly-traded equity makes up the lion’s share in the ﬁnancial landscape, most mid-sized companies don’t rely on IPOs or other public offerings. For decades, these companies have relied on private markets to grow.
Private investment offers numerous advantages. Family oﬃces in particular have become signiﬁcant players and attractive capital partners.
A Brief History of the Private Equity Market
Private investment hit the mainstream with the leveraged buy-out (LBO) transactions in the 1980s. A mainstay of Wall Street thrillers, an LBO simply meant buying a company with mostly borrowed money and then flipping it for a quick profit.
Proud founders hated this often-predatory practice, with good reason. Fortunately, today we tend to see more reasonable leverage and commitment for the long haul.
According to Pantheon, the number of publicly-traded companies in the US and Europe has declined since 2010 to approximately 11,000 (-2.2% p.a.), whereas private-equity backed companies grew to 17,000 (+5.7% p.a.).
Globally, uncommitted capital (“dry powder”) in private equity has grown nearly 17% annually since 2015, reaching a new record of $1.8 trillion in 2022. That’s a lot of money looking for homes — in other words, a lot of opportunity to quickly realize fulfilling business outcomes.
Beyond Private Equity Financing
“Private investment,” sometimes known as “alternative investment,” involves securities or ownership interests which are not publicly traded. If it’s on a public exchange, by deﬁnition it is not private.
While its total size is hard to ascertain due to the assets being, well, private, Goldman Sachs’ co-president of Asset Management Alternatives Mike Koester estimates that the capitalization of the private market has doubled from $5 trillion to $10 trillion in the last ﬁve years. Still small compared to the $120 trillion public market … but signiﬁcant, and growing.
In the alternative investment space, private equity dominates — roughly two-thirds of the market.
Behind private equity are real assets, including real estate, infrastructure, and resources.
The smallest segment, private credit or debt — alternative lenders with higher interest rates but more flexibility and accessibility — is also the fastest-growing, having increased tenfold in the past decade.
Conventional wisdom used to push growth-minded companies to public finance markets, but no more. The public market volume continues to shrink as companies turn away from traditional funding methods and toward private investment.
The Democratization of the Private Markets
Institutional investors used to be the primary players in the private markets. Today, you no longer have to be an institution to pursue the outsized gains available in this sector.
Private individuals and investment groups play an increasing role due to easing of regulations in Europe, the US, and elsewhere. Analysts estimate that 20-30% of private funds originate from retail investors, compared to 5-10% in the past.
Retail private investors may be high-net-worth individuals or independent sponsors. They might also be family offices — independent companies that high-net-worth families use to outsource their ﬁnancial growth.
A family oﬃce can’t solicit new investors like a fund can. As such, they face a lower regulatory burden compared to funds. (See our article on the subject for in-depth reading on family oﬃces.)
According to some estimates, the number of family offices has grown tenfold in ten years, each with anywhere from tens of millions to tens of billions to deploy.
The Beneﬁts of Family Oﬃces for Business Owners
Not only are we seeing the scale tip from public to private financial markets, from institutional to non-institutional investors, but also from traditional investment vehicles to direct investment.
Family oﬃces have many advantages as investment partners for businesses. They don’t face the same pressure for quick gains that fund investors place on fund managers. They can be patient, as well as flexible in their funding options (debt, equity, hybrid).
Family oﬃces increasingly prefer direct investment over managed funds and their fees. This is a key difference, especially for companies that have avoided private equity, presuming it to be unsympathetic and ruthlessly profit-driven.
Direct investors tend to be more personally engaged in their investments, interested not just in yield but also in added value and impact. High-net-worth families have often built businesses of their own. They may have unique skill sets to contribute.
Like family offices, independent sponsors are a natural evolution of the boom in direct investment. Independent sponsors act like private equity funds, except they source deals before the capital is raised. (See our article for a deep dive on independent sponsors.)
Matching the Right Company to the Right Direct Investor
It’s hard to turn down a big check … but be careful. A misalignment of company and investor can be disastrous. The money isn’t enough — intention and strategic contribution matter just as much, if not more.
Before you pick your funding source, consider:
- Where are you in the life cycle? Are you in the ideation phase, launch and traction, scaling and growing, the breakout phase, or the “established” phase?
- What’s your endgame? Are you looking for disruptor status and a billion-dollar valuation at exit? Self-sustaining middle-market status? A valuation boost?
- How much control are you willing to give up? How much equity are you offering, or do you prefer not to dilute? Different investors and structures leave you, the owner, with more control — for better or for worse.
- What’s your time horizon? Are you too young to retire and looking to cash in some of your chips while remaining on board? Do you anticipate a quick boost and cash-out, or does your private investment partner have to sit tight for a three-year plan to play out? Five years? Ten years? Different investors have different capacities for patience.
Cap Expand Partners matches promising companies with the right capital sources and financing structures. If it’s time for funding and you need guidance, don’t hesitate to reach out to us. You have nothing to lose by having the conversation. Let’s get the ball rolling on the next phase … or the exit strategy.