In May, as largely peaceful demonstrations over the killing of George Floyd were condemned by some who focused on sporadic violence and the destruction of a few small businesses, the satirical website The Onion published a story headlined “Protesters Criticized for Looting Businesses Without Forming Private Equity Firm First.” Private equity’s dismal reputation stems mostly from a subset of buyout firms that invested in distressed companies, like Toys “R” Us, that then failed. The reality is that most U.S. private equity firms are interested in helping businesses grow, not grinding them to dust. To get the truth about PE, all you have to do is ask the founders who have used it to help them grow their companies while retaining an ownership stake.
So that’s what we did.
Inc.‘s second annual list of founder-friendly private equity firms shines a light on 50 shops that have had success supporting founder-led companies. To compile the list, we once again went straight to the source: entrepreneurs who have sold to private equity. It’s a group that’s been expanding for more than two decades. In the U.S., the number of PE-backed businesses has grown 30 percent compared with 2015, according to research firm PitchBook.
While new private equity investments have slowed meaningfully since the onset of the pandemic, PE firms, armed with record amounts of capital, are completing more add-on acquisitions, which fold businesses into existing portfolio companies. For entrepreneurs who are now struggling, merging with a PE-backed rival could lead to the best outcome.
“We find a lot of situations where a PE firm will do an add-on acquisition and keep the founder on board,” says Dave Brackett, co-founder and CEO of private credit manager Antares Capital, which has helped finance acquisitions for more than 400 PE firms. One plus to having a PE partner today, he adds, is the chance to benefit from strategies developed by the other companies in the firm’s portfolio. “They can take the lessons learned in some of them that are going well and share them quickly across those 20 to 40 portfolio companies to get those businesses performing more quickly,” he says.
For founders, taking investment from a PE firm during a downturn doesn’t have to mean selling at a discount. “You might think about a kind of delayed compensation arrangement in the form of earn-outs,” says Ben Persofsky, executive director of the Center for Family Business at financial services firm Brown Brothers Harriman. “Then there’s still a provision that you can get rewarded for a good performance, as if Covid never happened.”
In this time of uncertainty, if you are considering private equity, first decide what kind of support you need, and then identify firms with that specific expertise. “The comment ‘know your investor’ is probably doubly true now, particularly if it’s a family business or a business you’ve been running for a while and you really care about your people,” says Tom Stewart, executive director of the National Center for the Middle Market. “You want to do your human capital due diligence as much as your capital due diligence.”
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See the full list here.
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The awards and designations presented on this website are the opinion of the respective parties conferring the award or designation and not of K1 Investment Management (“K1”). No such person conferring any of the listed award(s) or designation(s) is affiliated with K1 or is an investor in K1-sponsored vehicles.
The “Founder-Friendly Investors” award is a program designed by Inc. Magazine to help founder-led companies accelerate growth and create revenue. Private equity and venture capital firms that have exited U.S.-based, founder-led portfolio companies are eligible to apply. For investments to qualify, portfolio company founders must have remained actively involved in their business for at least one-year post-investment. Winning firms are selected based upon their track record, reputation, leadership and founder references. K1 is not aware of the number of advisers also surveyed for the award. Like all entrants, K1 paid a fee to be considered for this award and to use the award logo in collateral materials. This award is not to be construed as indicative of K1 future performance. Reference to an award is only one piece of information relevant to an evaluation of an investment adviser such as K1. Finally, this award represents information as of a specific date and time and may not reflect important information related to an evaluation of the investment adviser which has occurred prior to, or subsequent to, the award.
The receipt of compensation influences, and is likely to present a potential material conflict of interest, relating to any granted award or designation. There can be no assurance that other providers or surveys would reach the same conclusions as the foregoing.
