In 2017, private equity investors closed on more than 1,000 deals worth about $69 billion, an all-time high. More than $21 billion was raised in 2018 for minority investing in addition to the record-high $23 billion that was raised in 2017 specifically for that purpose.
Advantages for Investors
In today’s crowded market, minority investments offer middle market private equity firms a chance to differentiate themselves and gain more market share. A number of firms have all diversified to be more inclusive of various deal terms, allowing them to cast their deal sourcing net much wider.
The new types of funds allows private equity firms to make non-control investments and be flexible with solutions for business owners. A non-control equity strategy can help a company grow faster than it could on its own. It fills a need in the market for businesses that would like to partner with firms that have access to operational resources and capital, but aren’t quite ready to give up all the control.
Many companies have capital needs that can’t be satisfied in the traditional lending markets anymore. Some companies need capital for add-on acquisitions, shareholder redemptions, or liquidity, but that need doesn’t necessarily warrant a change of control.
Benefits for Businesses
Minority investing is not only good for private equity firms and their investors, it also gives business owners more options. Selling a minority stake in a business allows the owner to take some chips off the table, buy out another minority owner, or get capital for an add-on acquisition, all while maintaining control of the business and having the opportunity to cash out at a later date.
The minority investment strategy works best for companies that are looking to continue to grow. Owners who are interested in selling a minority stake in their company are inherently bullish. They believe their company’s best days are ahead of them and are excited by what can be achieved with the right capital partner.
