On January 12, 2021, ACG National Capital will be holding a monthly meeting entitled, “The Changing Landscape in Private Equity and Venture Capital.” This is the first monthly meeting of 2021, and it couldn’t come at a more interesting time for the founders and owners of businesses in the National Capital Region.
While the calendar may have turned over from 2020 to 2021, many of the same challenges that plagued businesses last year still remain. There is still a global pandemic raging that is changing how companies operate and conduct business. And there is still an associated economic downturn that’s resulting from the pandemic.
In this environment and economy, many business founders and owners may assume that private equity and venture capital dollars are unavailable, or that funding opportunities have dried up. But they may be surprised to learn that the opposite is true.
We recently sat down with Michael Lopes, a Vice President at Bernstein Private Wealth Management, who represents several entrepreneurs whose exits involved private equity. Michael will serve as the moderator at the upcoming Monthly Meeting and is an expert in private equity investing.
During our conversation, we talked about why companies should seek private equity investment, what investors look for in companies, and how the ongoing pandemic and economic downturn are influencing the private equity and venture capital industries. We also talked about what attendees can expect to learn from the January Monthly Meeting, which will feature multiple juggernauts of the local private equity and venture capital industries, including:
- John Burke, Co-Founder and Managing Partner, PROOF
- Morgan Higgins, Principal, Blue Delta Capital Partners
- Michael Lustbader, Managing Partner, Arlington Capital Partners
- Colin Gutman, Managing Partner, SaaS Ventures
Here is what Michael had to say:
Corporate Growth, Capital Style (CGCS): What kinds of companies do private equity and venture capital firms look for? What makes a company of interest to these firms?
Michael Lopes: The short answer is, “It depends.” It really depends upon the industry and what stage the business is in. Venture capital firms tend to be associated with companies that are more in their nascent stage. They’ve typically passed the hat around to friends and family to stand up the business and prove the concept, and are now looking for money to scale marketing and operations.
We tend to see these firms most active in the healthcare, biotech, software/technology industries. They want to see disruptive, proprietary technology/solutions with large, profitable market opportunities. But that’s not enough, they want to see quality ownership and management teams they feel can execute.
Private equity firms tend to focus on businesses that are much further along in the lifecycle. These are going to be more mature businesses with solid profitability and stable cash flows. They have industry-leading products or services with solid customer relationships, which are ideally monetized in the form of recurring revenue. These firms are quite active across all industries, from home services, to dental and veterinary practices, to software/technology, to real estate… to name a few.
Private equity will be drawn to an opportunity because they believe that the business will serve as a good platform to grow, or “roll-up” through acquisitions, or as a “bolt-on” to an existing platform. For bolt-ons, firms are typically looking for targets with IP, access to key customers, or simply to access scale for the business.
CGCS: Conversely, why would venture capital and private equity funding be attractive to these kinds of companies? What other funding alternatives exist for them, and why would private equity and venture capital funding be a superior alternative?
Michael Lopes: At the end of the day, there are a number of different ways for founders to fund their business and provide the capital necessary for expansion, growth, or ultimately exit.
For startups and early-stage companies who are looking to fund their growth, passing the hat around to friends and family members is usually the first step. From there you can move on to the angel investor groups, of which there are many, particularly here in D.C. These groups are comprised of successful professionals in the business community who vet investments together and pool their investment dollars to do deals.
Angels are typically writing checks in the tens of thousands, to the hundreds of thousands range. Once a company has progressed beyond this point, venture capital enters the equation. Each step along the way, the due diligence component of the investment, and the negotiation of terms becomes more rigorous, as once VC is involved, you are looking at organizations who are writing seven-figure checks. It’s a lot of work and compromise on both sides – the company and the fund.
For that and other reasons, once at the VC stage of funding a business, I firmly believe that founders need to operate with the mindset that not all checks are equal. There is no shortage of funds that will write a check. Entrepreneurs have to take into consideration what they get through the relationship in addition to the capital – the force multipliers that are inherent in a venture capital deal when teaming with the right firm.
Venture capital firms are synergistic partners invested in a company’s success. They often bring extensive knowledge and expertise in a company’s marketplace or industry to the table. They also bring a Rolodex of good management talent to the table, as well. Partner with the right firm.
It’s a similar situation with private equity, although the circumstances of the business are different. As I mentioned, PE tends to look at more mature businesses, and ownership of these businesses might be looking to take some money off the table to recap the business, look for a fund to partner with to finance growth through acquisition, or to exit the business completely.
In most cases, there is at least some component of ownership maintaining an interest in the business, so in order to accomplish additional wealth creation, choosing the right fund to partner with will yield those same force multipliers we talked about earlier.
The last thing I should mention is that there are more options today than ever for owners to fund their businesses, from crowdfunding to traditional lenders (banks), to venture debt providers, to middle-market direct lenders, in addition to what we think of as traditional PE and VC. Choosing the right advisors to navigate this landscape is essential.
CGCS: 2020 was an interesting and eventful year, to say the least. One of the largest, most noteworthy events of the year was the pandemic and associated economic downturn that accompanied it. Has the pandemic and downturn impacted the private equity and venture capital industry? Why or why not?
Michael Lopes: This is another question that really depends on the market and industry. In our area – the National Capital Region – the pandemic and resulting economic downturn really hasn’t had a profound impact on the private equity and venture capital industries, or on corporate growth activity. Much of that is due to the area’s large government contracting industry, and the technology/services-based economy.
In the current economic environment, the government contracting market has continued to be particularly strong, and M&A has continued at a solid pace.
Many investors see government contracting as counter-cyclical. Companies with attractive contract portfolios, relationships with the right customers, and high-end capabilities are considered to be rather insulated from the ebbs and flows of the larger economy.
That kind of insulation from economic trends and stability are attractive to investors – especially during an economic downturn. This has drawn a lot of interest from private equity and we saw a lot interest in 2020, which is continuing already through the start of this year.
CGCS: What does private equity and venture capital investment look like in 2021? Is there private equity and venture capital funding available? How much opportunity exists out there, right now, for companies looking for venture capital or private equity funding?
Michael Lopes: There is a robust number of opportunities for the right companies looking for private equity funding in our region right now. In fact, speaking about funding in general, the options for funding for companies of all sizes are probably are broader and more robust now than at any time in recent history.
Investors, large institutions particularly, but wealthy investors as well, are looking at the U.S. stock market and the returns that they can expect to receive on their investments given current valuations and where interest rates are at. What they’re seeing right now are projected returns in the new decade that are considerably more muted than the last. They’re also projecting more volatility in the near future in public equity and fixed income markets.
Investors that are looking for diversification benefits and more attractive returns than those offered in public equity and fixed income markets will continue turning to private equity investments to accomplish those goals. Private equity has historically outperformed public equity markets in the past. And that’s not likely going to change anytime soon.
So, there is a lot of investor interest in private equity as an asset class offering differentiated returns, and that’s attracting investor dollars. This increased interest and investment means more money is available for companies looking for funding. All told, there was more than $1T recently raised by private equity firms that’s ready to be deployed. Low interest rates for the foreseeable will also contribute to maintaining the current pace of PE activity in particular.
CGCS: Next week, you’re moderating a panel discussion entitled, “The Changing Landscape in Private Equity and Venture Capital.” Who should attend this event, and what can they expect to learn?
Michael Lopes: This event is an absolute must-attend for the founders or owners of businesses that are developing quality assets, but recognize that what got them “here” might not get them to where they’re looking to be. They need growth capital and a financial partner who brings more than just a big check to help drive continued growth.
It’s also a must-attend for executives of larger, more mature companies and assets that may see private equity firms as potential acquirers of their businesses.
But it’s not just an event for those looking for funding or exits. Lawyers or business consultants that specialize in corporate growth activity can also learn something from our panelists. The people on the panel are the best people in this area to learn from when it comes to private equity and venture capital.
Michael Lustbader from Arlington Capital Partners has a tremendous growth story. In fact, Arlington Capital Partners was even named the Private Equity Deal Team of the Year at this year’s ACG Corporate Growth Awards. There is also a lot attendees can learn from Morgan Higgins of Blue Delta Capital Partners, which recently sold intelligence analysis firm, Metis Solutions, to PAE for $92 million. Morgan and Blue Delta are doing very exciting things in the area of providing growth equity to government contractors, and it’s exciting to see the success they’ve been having.
On the VC side of the discussion, John Burke and his firm, Proof, closed on a $120mm round of funding late last year, and Colin Guttman also just completed a fresh round of funding to continue making investments.
To register online for the ACG National Capital January Monthly Meeting, click HERE.