Comments on: Private equity: having your cake and eating it too?

By: The Private Equiteer

The Private Equiteer — Mon, 20 Jul 2009 03:07:00 +0000

Alex: my reference to “business risk” was quite primitive… I’m talking about if earnings increase or decrease $1, how affected are founders vs investors? If we are affected in the same way (proportional to ownership), then I’d say we are exposed to the risk of the company similarly.

In PE, I accept that we want exposure to different risks and hence use tools such as preferred equity, stock options, etc., but I was pondering the idea of investors investing as equals.

Just a thought.

By: Alex

Alex — Sun, 19 Jul 2009 12:19:46 +0000

Can you define what you mean by business risk? I think there are 2 different factors here which are worth separating as to how risk plays out in a PE deal like the one you are describing:

1) Cash out – how much in $ terms and also as a % of total value do the founders get out of the business. I would say the vast majority of PE deals involve at least some cash out (even if badged as “growth capital”) simply because some cash needs to go off the table to make room in the capital structure for PE money.

2) Capital structure – of the money that stays in from the founder, and comes in from PE, how much of each ranks where in the capital structure.

In terms of 1) as long as there is cash out then there can never be “equal risk” between founders and PE – fundamentally the founders are de-risking.

The best you can do is aligning interests in terms of how you set up the capital structure so that the money that remains from the founder is equally at risk with the PE money coming in. But I think that takes us firmly into Financial risk rather than Business risk?

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