Tag Archive for: investor

By Ellie Pigott

Private Equity (PE) investment has long been considered a lucrative yet mysterious realm of the financial world. As opportunities in this sector continue to grow, so do the misconceptions that surround it. In this blog post, we will debunk some prevalent myths surrounding PE investments, shedding light on the realities that private equity investors often overlook. From issues of transparency to perceived riskiness, understanding these misconceptions is crucial for making informed investment decisions in the dynamic landscape of private equity.

1.    Misconception: Lack of Transparency

One prevailing misconception about private equity is the perceived lack of transparency. Many believe that PE firms operate behind closed doors, limiting the level of disclosure they share with investors and the public. While it’s true that private equity investments involve a certain degree of confidentiality, assuming complete secrecy is an oversimplification. In reality, reputable PE firms understand the importance of transparency and regularly provide investors with detailed information on fund performance, strategy, and financial health. By fostering trust through open communication, firms aim to build enduring partnerships with their private equity investors.

At Traction Capital, we promote transparency through quarterly investor updates that include portfolio highlights, lowlights, financial performance, and areas in which investors can lend a hand. In addition, we host an Annual Fund Update that includes a deep dive into fund performance and an opportunity to connect directly with founders and key leadership.

2.    Misconception: Risk Tolerance

Another common misconception revolves around the perceived riskiness of investing in private equity. Some investors shy away from the asset class due to the notion that it is too volatile and unpredictable. While it’s true that private equity investments carry inherent risks, the level of risk can vary significantly based on the type of investments made and the expertise of the PE firm. Seasoned private equity investors conduct thorough due diligence, carefully selecting opportunities and implementing strategies to mitigate risks. Understanding that risk is inherent in any investment, regardless of public or private markets, helps dispel the myth that private equity is unmanageably precarious.

3.    Misconception: Limited Liquidity

A prevalent misconception among potential private equity investors is the idea that their money will be tied up with little liquidity for an extended period. While it’s true that PE investments typically have longer holding periods compared to public equities, this does not mean investors are completely locked in. Many PE funds have specific exit strategies, such as selling portfolio companies or pursuing secondary market transactions, providing investors with opportunities to access their capital. Understanding the expected holding period and exit mechanisms is crucial for aligning investment horizons with personal financial goals.

4.    Misconception: Exclusivity and Inaccessibility

Some investors perceive private equity as an exclusive club, accessible only to institutional investors or high-net-worth individuals. This misconception often stems from the historical norm, but the landscape is evolving. Today, many PE firms offer investment opportunities to a broader range of investors through funds, providing diversification benefits typically associated with institutional portfolios. Access to private equity is expanding, and investors can explore various avenues to participate, fostering a more inclusive investment environment. Although more accessible than previously, many funds still have investment minimums and require investor accreditation.

Starting Investing Today

As the private equity landscape continues to evolve, dispelling these common misconceptions is crucial for fostering a more accurate understanding of the opportunities and challenges within this asset class. Investors who delve into private equity armed with accurate information and a nuanced perspective are better equipped to navigate its complexities. By challenging preconceived notions, we pave the way for a more inclusive and informed investment community, unlocking the true potential that private equity has to offer.

If you have questions or are interested in investment opportunities within PE, reach out to us at cooper@tractioncapital.com.

 

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By Ellie Pigott

Selling your business can provide you with financial flexibility, free up time from day-to-day responsibilities, allow for retirement or lifestyle changes and much more. However, many businesses owners are hesitant due to common private equity misconceptions. Some of these PE misconceptions and fears include incoming layoffs, “stripping and flipping”, strategic misalignments, loss of control, and impact on company culture. In this blog, we’ll dive in and debunk these common private equity misconceptions and help you set up your exit for success.  

1. Misconception: Strategic Misalignments 

A common fear or misconception amongst business owners is that the private equity firm’s strategy doesn’t align with the company’s mission. It’s not unlikely you will encounter these firms in the process of selling your business, but thorough due diligence and clear discussions during the negotiation process will help determine alignment on strategic goals. Business owners should choose a PE partner whose vision aligns with the long-term objectives of the company. Sometimes this results in taking less money upfront to benefit the overall well-being of the company.  

2. Misconception: Stripping and Flipping 

Within the broader definition of strategic misalignments, many businesses owners are weary of PEs because of their reputation to “strip and flip” the businesses they purchase. The term “strip and flip” refers to selling off valuable assets of a company and then selling the restructured entity. This model is used by some, but similarly to points made in “Common VC Misconceptions Many Founders Face”, not all PEs share the same model. Some common PE models include distressed investing (focus on purchasing companies that are going under) and growth equity (additional funding to add value and grow a business). When considering different buyers for your business, look at their firm’s model and consider what that might look like when applied to your business. 

When acquiring companies, Traction Capital exclusively uses a growth equity mindset. Traction intentionally seeks out companies where they can offer experience and a proven process to foster growth. 

3. Misconception: Selling Your Business = Layoffs 

Whether a PE firm uses a “strip and flip” model, or invests through growth equity, incoming layoffs can be a realistic fear but aren’t necessarily imminent. Clear communication and transparency about organizational changes and the role of key personnel are essential. Many private equity firms recognize the value of retaining experienced and talented executives and key employees. As such, part of the acquisition strategy often includes efforts to retain and incentivize key personnel. This may involve offering performance-based incentives, equity participation, or other retention measures.  

4. Misconception: Loss of Control and Impact on Company Culture 

Many businesses owners spend years growing and nurturing their business and fear losing complete control when they sell. As many items discussed in this blog, communication in the company vision is key and if continued involvement is desired it needs to be articulated. Instead of a purely hierarchical relationship, some private equity firms view the ownership transition as a partnership. They understand that the success of the business relies on a collaborative effort between the existing management team and the new ownership structure.  

This means owners and key executives may still be actively involved in strategic decisions, business planning, and day-to-day operations. While there may be changes in reporting structures, the goal is often to maintain continuity and benefit from the collective insights of both the existing and new leadership. Culture often plays an important role in this, ensuring values and company mission remain constant helps ensure a smooth transition. 

Next Steps in Selling Your Business 

While daunting at first, selling your business could provide much desired financial and lifestyle flexibility. By debunking the common private equity misconceptions many business owners face, you can be better informed when considering selling your own business.  

If you’re interested in selling your business to a growth equity PE firm or want to know more about what the process might look like, reach out to us at cooper@tractioncapital.com 

 

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By Ellie Pigott

Investing in a venture capital fund can be a great way for investors to diversify wealth beyond traditional means like stocks and bonds. However, many shy away from this potentially lucrative avenue because of uncertainties and common VC misconceptions surrounding returns, success rates, involvement and theses among funds. In this blog we’ll help explore and debunk many misconceptions faced by investors considering venture capital.  

1. Misconception: All Venture Capital Funds Are the Same 

When many investors think of venture capital funds, they picture traditional Silicon Valley funds investing hundreds of millions into prospective unicorns. While these funds do exist, they are only one piece of the larger VC pie. VCs come in all shapes and sizes, and their theses can vary dramatically. Examples of thesis niches include geography, industry, investment size, and company stage. It is important to consider your personal interests, values, specific areas of economic impact, and level of desired involvement before selecting a VC whose investment thesis aligns with yours.  

2. Misconception: Investor’s Returns Are Quick and Guaranteed  

Because of startups’ rapid growth, some investors may approach venture investing expecting an equally rapid return. Although the goal of a venture capital fund is to achieve significant and fast growth with the companies it invests in, this process still takes time. The average lifetime of a venture fund is around 10 years, which includes the time it takes to make all of the fund’s investments and exit from them (either by acquisition, IPO or liquidity). Fund managers may seek extensions if they anticipate needing to manage some of the investments longer.  

Some investors may also expect “guaranteed results” from VC in the same way they would expect certain results from other investments like treasury bonds. It is important to note that VC investments are inherently risky. The lack of a proven track record, uncertainty in market demand, and the potential for unforeseen challenges all contribute to the high level of risk. Despite this inherent risk, many VCs mitigate by having a lengthy and comprehensive due diligence process where they weigh the potential challenges and opportunities.  

3. Misconception: Most Portfolio Companies Will Succeed 

With such high return rates, it’s not uncommon to think that the majority of investments would be successful, but in most cases, this is the opposite. Every venture capital fund is different, so it’s important to seek information on your fund’s thesis, but generally, most VCs expect that for every 10 companies they invest in, 9 will fail. Traditional VCs rely on only a few successful exits to drive overall fund returns. However, some nontraditional and non-coastal VCs (like Traction Capital), rely on a different model. These nontraditional funds tend to bet that a higher number of their portfolio companies will succeed but at a more realistic level ($50M exits instead of billion-dollar exits).  

4. Misconception: Investors Have Limited Involvement in Portfolio Companies 

Just as all funds are different, the same is true for investors. Some VC investors seek a high level of involvement with the companies they help invest in, while others prefer to remain only as financial support. It is not typical for a VC fund to manage portfolio companies directly, but their involvement, advice, and network can be crucial for the success of startups. Active engagement and support from investors can contribute significantly to the growth of portfolio companies, especially when the investor can provide specific industry experience. Before investing in a fund, inquire about their level of involvement and determine if there are ways you can add value.  

Mastering the Venture Capital Landscape 

To navigate the world of venture capital successfully, it’s important for investors to be informed and understand the nuances of different funds, embrace the inherent risks, and recognize the potential for meaningful involvement and long-term returns. By addressing these misconceptions, investors can make informed decisions that align with their financial goals and risk tolerance in the dynamic landscape of venture capital funds.  

If you’re interested in taking the next step in learning more about investment opportunities in venture capital or have questions, reach out to us at ellie@tractioncapital.com 

 

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