Yesterday, the WSJ quietly featured a seemingly unusual new tactic for dealing with shaky private equity investments, that being giving the investment stake back.  In 2007, consumer/retail focused private equity firm NRDC Equity Partners invested in fashion house Peter Som Inc. The founders of the emerging brand took a $3 million cash infusion in exchange for a 65% stake in the business.

However, given the deteriorating state of all things luxury since, NRDC decided in January to go one step further then the standard write off, and relinquished its stake back to the Peter Som founders.  NRDC no doubt wants to spend its time following larger investments more closely, making the $3 million total loss somewhat insignificant.

While this sort of exit probably won’t become too popular, I’m sure there are other more notable private equity investments where firm owners would love to do the same.

With hundreds of “mid-market” private equity firms out there, it’s not always an easy task differentiating one firm from others with similar investment criteria.  Having a memorable, non-generic name certainly helps and is a start. However, what if that memorable name you picked is also shared by another firm.

Case in point: Balmoral Advisors based in LA versus Balmoral Capital based in London.  Balmoral Advisors invests in mid-market North American companies with sales of $25 to $500 million while Balmoral Capital looks for similar opportunities in Europe.  Luckily, the two firms operate on different continents so perhaps this is a non-issue.  But what happens if one starts trolling for deals in the others backyard?  Bankers are smart, but nobody likes unnecessary confusion.  I think the point for new firms is pretty clear.

So who came first?  Well, Balmoral UK was formed in 2003 versus 2005 for Balmoral LA.

And more importantly, what exactly is Balmoral?  It looks like it’s a large castle in Aberdeenshire, Scotland.

Now that it looks like Cerberus backed Chrysler will make it through Q1 of 2009, you have to wonder if the firm will take the time to update its website.

Despite generating more than a few headlines in 2008, the last news item on Cerberus’ News Releases and Public Statements page is a July 18th, 2007 note outlining some prepared remarks by John Snow to the National Press Club.

Although Cerberus is known as one of the more press shy private equity firms out there, a well crafted public statement on Chrysler probably could have been useful.

Either way, I wonder if we’ll see any news releases in 2009 . . .

It’s no surprise advanced education is fairly common up and down the professional ranks of most private equity firms. Whether it’s an MBA, JD, or even the PhD, you’ll find plenty of representatives.

The most popular advanced degree in the private equity world certainly has to be the MBA, but how common is it?

Scanning available title and bio information within Private Equity Database yields the following;

So while getting your MBA can’t hurt as you move up at the firm, the good news for those that decide against further business schooling, is that you still have plenty of company . . .

The lines between venture capital and private equity groups are generally pretty clear.  Afterall, the needs and resources demanded by new companies are distinctly different than those required by more established or mature businesses.  Given the differences, you don’t typically confuse a pe firm for a vc group, and vice versa.  However, despite the general venture capital private equity divide, there is a small but distinct set of firms engaged in investing across company stages.

Not sure what you’d call these firms, other than some sort of hybrid investor, although investment firm Technology Crossover Ventures (TCV) uses the firm name to spell it out for potential prospects.

Other hybrid investors such as Battery Ventures keep things simple for interested parties by breaking out portfolio holdings based on investment stage.  Battery Ventures lumps investments into one of three categories, including “Seed/Early”, “Expansion”, and “Private Equity”.  Battery is somewhat unique, (even amongst hybrids) as it targets opportunities across the entire spectrum of company stages (literally), willing to commit as little as a few hundred thousand for seed opportunities on the one side, to considering distressed situations on the other.

Hybrid firm Summit Partners doesn’t break out its portfolio companies as cleanly as Battery, however Summit does separate its varying investment products and breadth of range, willing to commit as “little as $5 million to more than $800 million of combined equity and debt per company”.  Summit Partners is somewhat unique in that in addition to providing venture capital and private equity funding, the firm also can commit junior capital.

Despite all the different hybrid strategies, one similarity amongst hybrid investors is that most tend to be specialist firms, with an unsurprising emphasis on technology.

So while the venture capital and private equity worlds both remain pretty crowded without a whole lot of differentiation amongst each, firms that are able to bridge the gap without a seeming preference for either, at least offer a perspective few others can match.

Warren Buffet famously states in Berkshire’s annual report that all he needs is 5 minutes before giving a yes or no on whether he’s interested in pursuing a transaction.  Not to discredit Mr. Buffet, (whose patience and track record is another story), but his quick judgment is also shared by many private equity pros.

Most firms plainly state in simple terms the types of businesses that interest them, and it doesn’t take much effort, analysis (or discussion) to determine if there’s a match.

So does your business fit the general private equity acquisition profile for new platform investments?  Based on general observations perusing firm websites, and setting aside (but not discounting) size, sector, and valuation considerations, see below commonly shared business characteristics many private equity firms prefer;

1. “Strong management”

Not sure why firms typically specify “strong” when it comes to management.  Afterall, who wants (or would admit they want) “incompetent” business leadership.  Bottomline, (and whichever way you want to describe it), most private equity firms prefer management to come with the business.

2. “Low capital intensity”

Private equity firms don’t like to spend the profits, so if your business does, and does so significantly just to stay competitive (let alone grow), let’s just say this doesn’t help.

3. “Diverse customer base”

Customer concentration is a definite deal killer.

4.  “Growth potential”

Whether organic or through add-ons, some sort of growth is preferable.  Operating in a sizeable and growing industry is certainly part of the story.

5. “Profitable”

While some private equity firms look for turnarounds, most don’t.  The more consistent your company’s earnings, the better.

Other notables include;

“Recurring revenue”

Firms love predictability.  Similar to the note on consistent earnings above, if your revenue numbers make for easy Excel model creation, firms notice.

“Defensible market position”

Private equity firms are more interested in leaders versus followers, so if your company is consistently re-acting to competitor moves or outside market forces, this is something you’ll need to answer.

“Mission-critical product/service”

Given the current economic climate, this characteristic is probably more in demand now than ever.  Many private equity firms specifically seek out businesses that provide products or services that are vital to other companies.

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Please note that the above characteristics are just meant to serve as a guide.  If your business doesn’t fit the descriptions, this isn’t to say firms will quickly pass.  Bottom line is, most businesses won’t match all of the above and every transaction situation is different (eg. valuation/industry/size are major, not to be overlooked factors). However, if you want that 5 minute initial yes/no answer, matching all (or none) of the criteria above will certainly help.

Taking a cue from Forbes 2008 list of America’s largest private companies, see below a list of America’s largest private companies backed by private equity.

No shock most of the companies below were acquired between 2005 and 2007.   Despite the size of many of the transactions, it’s interesting less than half (11/25) represent club deals.

( . . . well at least according to professional bio info available in PEdatabase).

Everyone loves rankings and so to help satisfy demand, we thought we’d conduct informal searches of professional bios listed within Private Equity Database and look at which schools tend to deliver when it comes to placement within private equity.

As far as which universities to query, we decided to favor schools with strong graduate business programs and used the top 25 schools listed in US News’ 2008 Graduate Business School Report as a basis for creating the list.    Keep in mind that the list below is based on number of mentions with no distinction between graduate or undergraduate degrees.

Rank by # of Mentions in PEdatabase	School	Query
1	Harvard University	“harvard”
2	University of Pennsylvania	“university of pennsylvania”
3	Stanford University	“stanford”
4	University of Chicago	“university of chicago”
5	Northwestern University	“northwestern”
6	New York University	“new york university”, “nyu”
7	University of Virginia	“university of virginia”
8	Dartmouth College	“dartmouth”
9	Columbia University	“Columbia University”
10	Yale University	“yale”
11	Duke University	“duke”
12	University of Michigan	“university of michigan”
13	Cornell University	“cornell”
14	Georgetown University	“georgetown”
15	University of California, Los Angeles	“university of california” AND los angeles, “ucla”
16	University of California, Berkeley	“berkeley”
17	Massachusetts Institute of Technology	“massachusetts institute of technology”
18	University of Texas, Austin	“university of texas” AND austin
19	University of Southern California	“university of southern california”, “usc”
20	University of North Carolina, Chapel Hill	“university of north carolina” AND chapel
21	Indiana University	“indiana university”
22	Emory University	“emory”
23	University of Rochester	“univeristy of rochester”
24	Carnegie Mellon University	“carnegie mellon”
25	Arizona State University	“arizona state”

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See below a chart showing the number of private equity firms formed each year since 1980 (at least according to our records).  Not all private equity firms readily disclose when their group was established, so the numbers below are not representative of all firms.  However, the sample is large enough to show trends, most notably the stark drop in firms formed in 2008.

Given reduced company valuations in today’s market, it’ll be interesting to see what new players emerge looking to take advantage in 2009.

In reviewing private equity firm websites, most firms that do provide portfolio information tend to follow a fairly predictable pattern. Typical portfolio areas generally show a list of companies along with logos, website urls and brief descriptions for each business. Nothing wrong with the norm, but when you come across a site demonstrating a little extra creativity, it certainly shows.

A great example can be found at energy investor Lime Rock Partners’ website. Lime Rock’s portfolio area breaks out current versus exited portfolio companies with tabs. However, the best part of the portfolio page is a world map showing each company’s location. Additional filters allow users to display portfolio companies by specific sector and/or location. Selecting a portfolio company brings up additional info in the format shown below.