Equity Financing Services
Privately-Held Middle Market Companies
A non-control equity investment is a transaction where an investor, generally a private equity firm or family office, acquires a non-controlling stake in a privately-held company, typically between 25% and 49%.
Private companies can effectuate a non-control equity investment for a variety of purposes including: (1) providing growth capital for either internal growth, capital expenditures, or acquisitions; (2) de-leveraging a business by paying off existing indebtedness (and possibly releasing personal guarantees); (3) providing existing shareholders with liquidity, for estate planning or other purposes; or (4) financing the buyout of existing minority shareholders.
Most middle market company management are unaware that private equity firms will make a non-control equity investment in a company as, historically, well over 95% of all private equity investments into middle market companies have been either buyouts or control investments. However, the number of private equity firms making or seeking to make non-control equity investments has increased significantly over the past two years and most experts project this trend to accelerate greatly over the next five years.
The reason for this strong growth is that the market for control investments in the middle market is saturated with literally thousands of firms vying for a limited number of deals with the majority of those deals being run through an auction process from a handful of middle market investment banks that target hundreds of potential investors with each auction.
Consequently, as a result of quality deal flow constraints, an increasing number of PE firms are now seeking “chunky minority” investments (i.e., 30% to 49%) in middle market companies and mitigating the risks of a non-control investment by structuring the transaction with a liquidation preference and other downside protection and requiring operational involvement (but not day-to-day management or control over the business).
In a non-control equity raise, the seller company will maintain operating and financial control over the company, allowing management to remain in the driver’s seat.
Furthermore, a private equity firm investor can deliver significant value to the seller including: geographical expansion of markets for the company’s goods and services, facilitating accretive or strategic acquisitions, implementing more sophisticated ERP systems, professionalizing sales and marketing systems, customer introductions and/or integrating new technologies or outsourcing capabilities to improve operating efficiencies and margins.
What are the investment parameters of the private equity transactions that Reedland will undertake?
Reedland Capital will raise $30–$40 MM on the low side with a sweet spot of $50–$150 MM in non-control equity. Enterprise values range from $100–$500 MM (pre-raise).
We are generally industry agnostic (other than real estate, oil and gas, and crypto) but concentrate primarily on: business services, healthcare, consumer products and services, software, all tech-enabled services, industrial and manufacturing, and financial services.
We also have the ability to create alternative capital solutions involving a combination of mezzanine debt and equity for companies that are more dilution-sensitive.
Why Reedland Capital Partners?
Preparing Our Client Company for the Equity Raise
Once we have completed a detailed financial analysis of our client company and fully understand their financing goals, we will arrange for a top-ten accountancy firm to do a summary desktop valuation of the company to ensure that all expectations are aligned.
Upon completion of the valuation, Reedland Capital will work closely with the management team to create a detailed fully-linked three-statement financial model, Confidential Information Memorandum, and other relevant investment materials. This information is compiled in a manner that we believe will resonate with prospective investors, creating a higher likelihood of success while concomitantly expediting the underwriting process.
We will facilitate the company’s procurement of a sell-side quality of earnings report from a top-ten accountancy firm. This Q of E will play a critical role in negotiating terms with prospective investors.
We will advise the company with respect to the “structured” elements of the investment; i.e., types of preferred securities structures available, operational involvement of, and downside protection to, the investor, and expected exit strategy.
Proprietary Targeted Process
Reedland will structure and arrange a bespoke investment vehicle for our client company that achieves the company’s financing goals. That structure will reflect, among other things, the type of securities offered, such as convertible preferred or participating preferred stock, downside protection for the investor, level of operational involvement, and exit strategy.
We will not utilize an auction process whereby hundreds of potential investors are contacted by email with an NDA and a data room link because such a process does not lend itself well to a non-control investment. Our process involves keeping the proposed transaction private and contacting generally no more than 10 to 15 prospective investors who have expertise in the Company’s industry and who Reedland believes are most likely to achieve company’s financing goals.
This process is the most likely to lead to a successful partnership between the company and investor, thereby propelling the company to greater growth and profitability.
Optimized Capital Structure
Contact us to discuss how Reedland Capital Partners might be able to assist you with your company’s financing objectives.
