Tag Archive for: Private Equity

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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TroutRoutes Acquired by onX

onX, a pioneer in outdoor digital navigation, today announces its acquisition of Minneapolis-based TroutRoutes, the industry’s leading mapping resource for fly fishing enthusiasts. TroutRoutes is part of Wayzata-based Traction Capital’s portfolio of companies. By bringing TroutRoutes into its portfolio, onX gains momentum as it enters a new market this spring with the upcoming launch of its newest app, onX Fish. Together, TroutRoutes and onX Fish will address the needs of 45.8M freshwater anglers across the United States.

Founded in 2009, onX develops mapping solutions that inform, inspire, and empower millions of outdoor recreationists. onX Hunt, onX Offroad, and onX Backcountry make up the company’s suite of apps and are built by explorers for explorers. This spring, the company will release onX Fish, a navigation and discovery tool for lake anglers. TroutRoutes, a solution built for river and stream anglers, will complement this offering.

“onX is home to nearly 400 employees who hunt, off-road, bike, hike, ski, climb, and fish. We develop products to solve the hardest challenges we face when we’re out getting after it,” said onX General Manager, Hunt and Fish, Cliff Cancelosi. “Zach Pope, founder of TroutRoutes, built the industry’s leading fly fishing app to solve problems for trout anglers looking for places to fish. His love for chasing trout, focus on stewardship, and commitment to solving real customer problems are the same principles that drive us at onX as well. We are excited to welcome the TroutRoutes team into the onX family and invest in their continued growth.”

“There’s a lot of synergy and shared values between the two companies,” said TroutRoutes founder and CEO Zach Pope. “For the past five years, TroutRoutes has been focused on meeting trout anglers’ needs by consolidating stream and river access information and developing toolsets to help anglers find and explore trout streams across the U.S. I’m proud of what we’ve accomplished. Coupled with onX’s extensive experience in outdoor navigation technology, TroutRoutes will innovate faster and solve more customer needs than we ever could on our own. We’re embarking on an exciting new chapter at TroutRoutes.”

As the fishing season kicks off across the U.S. this spring, TroutRoute customers can expect the company to continue updating its offering and toolset. onX Fish will launch on iOS and on the web exclusively in Minnesota this spring, with plans to expand across the Midwest later this year.

Traction Capital Acquires Minnesota Manufacturing Company Nu-Star (PowerPusher®)

 

Traction Capital is proud to announce its acquisition of Nu-Star, a well-established manufacturing company with a rich history dating back to 1959. Nu-Star specializes in material handling, with proprietary Tuggers and Pushers called PowerPushers® that are battery powered and designed to move almost any rolling load from automobiles, trash dumpsters, railroad cars, and even heavy reels of electrical wire and hose.

With the current ownership gradually stepping back from day-to-day operations, this partnership marks the beginning of an exciting new chapter for Nu-Star, bringing an innovative approach to enhance efficiency, technology, and overall business performance.

Nu-Star’s CEO, Scott, shared his enthusiasm about this partnership, stating, “The management team is very excited about this acquisition, and very eager to begin working with the Traction team. We are looking forward to growing Nu-Star to the next level.”

Ryan, the VP of Material Handling and Sales at Nu-Star, added, “We are thrilled to welcome Traction as our trusted partner, and have already been impressed by their exceptional communication and active listening. Their rich experience with other companies promises to rejuvenate our culture and address long-standing concerns, propelling us towards a brighter future.”

Traction Capital, known for its unique blend of financial and “smart” capital, brings not only investment but also a deep well of experience and resources to the table. Comprised of entrepreneurs, business owners, and investors, Traction Capital has a strong passion for helping businesses grow. This commitment to fostering success in the Minnesota business landscape aligns perfectly with Nu-Star’s vision for the future.

“Nu-Star has a remarkable legacy, and we see immense potential in the company” says Shane Erickson, Managing Partner of Traction Capital. “We look forward to working alongside their existing team to implement the Entrepreneur Operating System® (EOS), streamline warehouse operations, and introduce advanced technology solutions to enhance efficiency and overall quality.”

The collaboration between Traction Capital and Nu-Star represents a testament to the power of visionary partnerships in the business world. Together, they are set to revitalize Nu-Star, injecting new energy, expertise, and technology to drive success in the manufacturing sector.

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 investor events!

 

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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.

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.