Tag Archive for: Private Equity

5 Types of Alternative Investing

By Ellie Pigott

For many, when they hear the word investing, they think of the stock market, retirement funds or maybe even crypto. But the possibilities don’t stop there. For those whose lifestyle can allow a less liquid investment vehicle, alternative investing is a great option. There are several vehicles to choose from including private equity, venture capital, angel, real estate, storage unit investments and more.

Here are several investment vehicles we have come across.

1. Private Equity

While private equity takes many forms, the overarching definition is investing in private companies either directly or through a fund. This can be done to gain shares of the company or to acquire the company.

Unlike the stock market, these investments have very long holding periods. Private equity firms typically exit between 3-5 years, but investors can expect waiting up to 10 years for their return.

Over the last 20 years, returns in private equity have averaged higher than that of the S&P 500. The current average PE return in the U.S is just above 10%.

2. Venture Capital

One of the many forms of PE is Venture Capital. This investment vehicle still invests in private companies but the companies receiving investments are startups with large potential for growth.

As opposed to the start-up going to the bank to receive a loan or running a crowdfunding campaign, the VC option provides the startup with both capital and expertise.

This can be extremely beneficial to entrepreneurs, especially those who lack industry knowledge in a certain area. For example, if the founder has a great vision for the company but doesn’t know much about accounting and finance, the VC firm would help fill that knowledge gap.

VC funds are typically 10 year hold periods that can extend to 12 years depending on their needs. Investors become Limited Partners (LP) in the fund and can experience tax benefits such as 1202 stock treatment, reducing overall tax liability.

VC Fund managers act on behalf of the fund to source investment opportunities, perform due diligence on companies and founders, and assist startups to growth and eventually exit.

At Traction Capital, we help connect investors with our portfolio companies that are directly related to their expertise. For some this can be mentorship, a board seat, or more, depending on the investor’s level of interest and availability.

3. Angel Investing

Similar to Venture Capital, Angels also invest in startups. This type of alternative investing is for individuals with high net worth, who provide the funds directly to the company. In most cases the capital is in exchange for equity of the company.

Because such high capital is needed, Angels typically need to become an accredited investor before investing. This ensures a level of stability and prohibits just anyone from claiming to be an Angel.

As opposed to a VC or PE fund, where a firm is doing the due diligence, this type of investment normally requires your own time and research.  To spread their risk, many Angels invest in several startups at the same time, across various industries.

Another way Angels lower their risk is by going in on a deal with multiple angels. This requires a network of trusted, well backed individuals. There are Angel networks for investors to join, some which provide deal flow, industry experience and educational opportunities.

4. Real Estate

During the pandemic the real estate market skyrocketed, but even prior, the market had been consistently climbing. Over the last 10 years the market has grown an average of 5% year after year, not including 2021, in which the market grew 17%.

Across the board, annual rate of return in real-estate has averaged 10% over the past 10 years. Investing in real estate can take many forms.

The more hands-on forms include owning a rental property or flipping a house. However, if you are looking for a hands off vehicle where your money can grow over time, a Real Estate Investment Trust, Mutual Fund, Limited Partnership, or Investment Group might be a better fit.

REITs are publicly traded shares of a commercial real estate company that owns many properties. In a Real Estate Investment Group, you buy into the fund by purchasing property, that property is then managed by the investment group. Lastly, a Real Estate Mutual Fund is an investment vehicle requiring less capital. This type of fund is more liquid, as they primarily invest in REITs, instead of purchasing property.

5. Storage Unit Investments

Just as VC is a division of PE, Storage Unit Investments are a division of Real Estate. There are several ways to go about investing in a storage facility, the main three being REITs, Self-Storage Syndicate and buying a property.

The first is the least risky and arguably requires the least amount of day-to-day work. Because REITs are publicly traded, they have strict regulations that help protect against fraud. Like any REIT, storage unit investments are great for consistent growth over a long period of time.

The second option is a syndicate. This allows investors to pool their money with other investors to purchase a facility that would then be managed by the sponsor of the fund. Like a VC fund, the investors would be LP’s, with basically no liquidity, but high potential returns.

The third option is to buy the storage unit facility and manage it yourself. Although the profits are consistently climbing, this requires a lot of upfront capital, as well as management knowledge. This option also requires the most hands-on work, as opposed to the others, which allow your money to sit and grow over time.

Next Steps

With so many alternative investing options, deciding on the right one can be challenging, confusing, and time consuming. If your lifestyle can allow illiquidity, alternative investing is a great way to not only diversify your portfolio, but to get involved with a founder or project that you enjoy and can help grow. The most important thing to keep in mind with any of the options is history and legitimacy of whatever investment vehicle you choose. Always be sure to do your research and collect all relevant data before committing any capital.

Traction Capital is a private equity and venture capital firm based near the Twin Cities. Unique from others in our industry, our entire team is made up of entrepreneurs.

As a team full of entrepreneurs that have successfully run and exited companies, we are well equipped to advise and assist our portfolio founders with any challenges that might arise.

If you or someone you know is interested in raising capital or you’re interested in alternative investing options like private equity or venture capital, reach out to us at peyton@tractioncapital.com. In addition, be sure to watch our Resources page for info regarding our potential investor events!

Startup Valuation Trends 2022 [what founders need to know]

By Ellie Pigott

Over the last two years we’ve watched as Covid has turned our world upside down. Virtually every industry was affected, and Venture Capital was not an exception. In an attempt to keep the economy moving while the country was at a standstill, the Federal Reserve pushed more money into the U.S. economy than ever before. Families received stimulus checks, student loans were put on hold, and even the Venture Capital world got a boost.

This led to a record-breaking raise in the VC world. Thanks to the increased amount of corporate bonds purchased by the Fed, many investors were left with an influx of cash. This was re-invested in a variety of ways, one avenue being through VCs.

With the boost of investment money, the obvious assumption might be that VC’s would be investing in more businesses. This is partially true. The number of businesses they invested in rose but not proportionally to the amount of money they raised. According to the Q4 2021 PitchBook-NVCA Venture Monitor, the total number of deals grew to 17,054 in 2021. Up 40% from 12,173 the previous year. For context the total amount of funding almost doubled during this period (330 billion raised in 2021 compared to 166.6 billion in 2020).

This enormous gap in capital and deals can be explained by hockey stick growth in startup valuations. However, as we see the light at the end of the covid tunnel, many are left wondering what is in store for valuations in 2022? While nobody can say for certain, we are already seeing startup valuations trend down. The money that helped VCs achieve their record-breaking capital will still be in their circulation but the rate new capital is being raised will slow dramatically due to the Fed taking a step back.

Valuation data is showing consumer tech and enterprise tech taking the biggest hits, while Fintech, Biotech and Pharma remain steady. Although we shouldn’t expect to see a complete drop off from the 2021 high, valuations will gradually start to dip. However, they are still expected to remain higher than pre-pandemic.

Regardless of which way the market is trending, the importance of an accurate valuation remains constant. With a valuation too high you risk getting turned away from investors before you even set foot in the door. On the contrary, with a valuation too low you risk losing money you didn’t know you had. To help improve your valuation or ability to raise funding, there are a few things to keep in mind.

  • Well Thought Out and Defined Use of Capital
  • IP or Protections
  • Barriers to Entry
  • Experienced Team
  • Clear Objectives and Plan
  • Thoughts Around a Future Exit
  • Aggressive but Attainable Projections

When presenting to any source of potential investment money, whether it be VC or not, it is extremely important to clearly define your use of capital. It needs to be visible that there is both a need and an effective use for the funds. The best way to demonstrate this is through your budget. Show your revenue, costs, variables, and any extra expenses that you foresee as your company grows.

Going hand in hand with your use of capital is your clear objective and plan. Not only do you need to show where you’re putting the money, you need to show how you’re going to make it work. Do you already have set goals and milestones you want to achieve? How will you stay on track and ensure you meet those quotas?

Consistently measuring how you stay on top of these things will be critical to your success. Part of this approach will also need to include any barriers to enter the market and any potential exit strategies you might foresee. All of these reenforce the idea that you need to be the most educated person on your industry, this will help to back your valuation.

Another important thing to keep in mind is your team. Each individual’s knowledge, expertise and experience will play a vital role in the company, especially in its early stages. It is important to make sure the gaps are being filled. The experience of your team will play a key role in its valuation. If you can prove their value to the company, you may be able to justify a higher valuation.

Lastly, be sure to include your projections. These need to be aggressive but attainable. Show your potential investor you’re a go-getter with confidence in your business but don’t make promises you can’t keep. Higher projections can lead to a high valuation but that’s only true if you can meet those expectations. Falling short of your high projections will not leave others with much faith in you or your business.

With these few tips in mind, it is easy to stay optimistic for valuations in the future. As we enter Q3 of 2022 nobody can say for certain what valuation trends will emerge. Whether valuations are on the verge of a dip or at their all-time high, it’s vital to remember the best type of valuation you can have is an accurate one. If you still have questions about valuating your company, reach out to our team. Our experienced team of entrepreneurs is ready and willing to answer any questions you have.

A Quick Recap on the 2021 Merger & Acquisition Market

By Cory Kaisersatt

As many may know, the merger and acquisition market was K.O.’d in 2020 due to the COVID-19 outbreak and the economic uncertainty of the year that followed. In 2021, however, M&A made a Robert Downey Jr. circa mid 2000’s level comeback. Last year’s M&A activity hit record setting numbers in the Q4 home stretch of October, November, and December – eventually eclipsing 2020’s volume by over $2B. This can largely be attributed to two leading factors: the subsiding of the pandemic and simultaneous success of public markets.

Stability and growth returned to the markets as companies and the general public better understood how to coexist with the pandemic. This increased certainty provided companies the confidence to resume growth acquisition strategy regionally and internationally as borders began to reopen over the summer months. The success of public companies only enhanced these effects. With revenue postings healthy across the board in 2021 and public companies comprising the majority of M&A deals, companies were given the confidence and the means to “pull the trigger” on growth-driven M&A strategies.

The activity was equally as fruitful for Private Equity. An increasing amount of capital is being allocated to funds that are more specialized in their approach and address a niche, allowing for general PE coverage of a broader range of industries. The longevity of PE is also becoming more promising as funds are diversifying their portfolios into a variety of deals including leveraged buyout, growth or continuation, and pure venture.

The leading sector for M&A activity remains Tech with ESG at a distant second. Due to the supply chain and labor complications, companies are being forced to adopt new technologies faster to streamline processes, connect with customers and improve productivity. ESG topics around workforce, sustainability and underrepresented people groups are being increasinbly prioritized by the public and, subsequently, corporations. There is also speculation that the SEC will require reporting on ESG matters in coming years.

The biggest concern in the M&A market reared its head late in the year as inflation rates in the U.S. skyrocketed to 7%. Inflation at this level hasn’t occurred since the early 80’s and has many economists and market participants uncertain on economic outlooks. In an attempt to combat the inflation problem, the Fed recently announced the first of what are expected to be several rate hikes in FY 2022. This is expected to lead to increased saving rates, discount rates and borrowing costs – all of which are typically indicators of a deceleration in M&A activity.

That is a wrap for 2021 M&A. We are excited to see what is in store in the space for 2022.