Private Equity 101- Everything You Need to Know About Private Equity

This video provides an in-depth exploration of the private equity world, demystifying its mechanics, terminology, and strategic considerations. Host Spencer Smith interviews Kyle Coots, Co-Founder and Managing Director of Miramar Equity Partners, who shares his career journey and expertise. The discussion begins with Coots' background in accounting, consulting, and various private equity roles, setting the stage for a comprehensive explanation of how private equity operates, from early-stage funding to mature investments. The conversation highlights the ubiquity of private equity in various sectors, including the insurance and healthcare industries, which is particularly relevant to the host's audience.

Coots breaks down private equity into a spectrum of investment stages, starting from seed equity for nascent ideas, progressing through venture capital for growing concepts, and then into growth equity and lower middle market private equity for businesses with established profitability or significant growth potential. A core theme is the valuation of businesses, explained through the concept of "multiples" applied to cash flow (EBITDA) or recurring revenue, driven by factors like growth profile and risk. The speakers also delve into the three primary ways private equity firms generate returns: growing the business (increasing EBITDA), enhancing its intrinsic value (leading to a higher multiple), and financial engineering (leveraging debt).

A significant portion of the discussion addresses common misconceptions about private equity, emphasizing that successful PE investment often involves professionalizing and growing businesses, which can lead to job creation and improved products, rather than solely cost-cutting. Coots stresses the importance of cultural fit and strong relationships between private equity partners and the management teams they invest in. The video further explores the strategic decision for a company to remain private versus going public, outlining the advantages and disadvantages of each path, particularly concerning regulatory burdens, investor input, and long-term strategic flexibility. Notably, Coots discusses Miramar Equity Partners' interest in the healthcare sector, focusing on ethical investments that improve patient care, access, and overall system efficiency through tech-enabled services and other innovative solutions.

Key Takeaways:

• Private Equity Spectrum: Private equity encompasses a range of investment stages, from seed equity (for initial ideas and prototypes) to venture capital (for product development and early growth) to growth equity and lower middle market private equity (for established businesses with profitability or significant scaling opportunities).
• Business Valuation through Multiples: The value of a private business is often assessed using "multiples," which are a shorthand for the present value of future cash flows. These multiples can be applied to metrics like cash flow (EBITDA), recurring revenue (for software), or book value (for financial services).
• Drivers of Multiples: A business's multiple is influenced by its growth profile (large addressable market, strong performance history, customer dynamics, pricing power) and its risk profile (sustainability, predictability, ability to service debt). Lower risk and higher growth typically lead to higher multiples.
• Three Ways PE Firms Make Money: Private equity firms primarily generate returns by: 1) growing the business (increasing EBITDA), 2) making the business more valuable (achieving a higher multiple through diversification, scale, or improved margins), and 3) financial engineering (using debt to finance transactions and paying it down over time, increasing equity value).
• Strategic Use of Debt: While equity represents ownership, debt is a lower-cost form of capital and is often used by private equity firms to efficiently capitalize a business. However, it requires a certain level of financial sophistication, predictable cash flow, and robust financial reporting that many founder-led businesses may lack.
• Beyond Misconceptions: Private equity's reputation is sometimes negatively skewed, but many firms aim to professionalize and grow businesses, creating jobs, improving products, and providing better careers for employees, rather than solely focusing on aggressive cost-cutting.
• Importance of Relationships and Culture Fit: Successful private equity partnerships heavily rely on strong relationships, shared values, and cultural alignment between the investors and the management team. This ensures effective collaboration, especially when navigating challenges or disagreements.
• Public vs. Private Considerations: Going public offers liquidity and access to a diverse investor base but comes with increased financial reporting requirements, greater transparency, and potential pressure for short-term performance. Staying private allows for more long-term strategic decision-making without quarterly earnings pressure.
• Ethical Healthcare Investment: Miramar Equity Partners focuses on healthcare investments that aim to improve patient care, increase access, and enhance system efficiency. Examples include ambulatory infusion centers (reducing hospital waste) and tech-enabled services for medical record sharing, emphasizing making money while doing good.
• Preference for Recurring Revenue: Private equity firms often favor businesses with recurring or highly reoccurring revenue streams (e.g., software subscriptions). These models offer greater predictability and sustainability, allowing management to focus on strategic growth rather than constantly re-acquiring revenue.
• Common Reasons for Deal Failure: Deals can go south due to poor management team fit, overly aggressive growth bets, the business not being as strong or sustainable as initially perceived (e.g., reliance on a single key relationship), or unforeseen external factors like pandemics.
• Pathways into Private Equity: Aspiring professionals are advised to start their careers in investment banking or management consulting. Key personal attributes include intellectual curiosity, a continuous desire to learn, actively seeking mentorship, and developing an "investor perspective" by constantly evaluating the value and sustainability of businesses.

Key Concepts:

• Private Equity: Capital invested in companies not listed on a public stock exchange.
• Seed Equity: Early-stage funding for ideas or prototypes.
• Venture Capital (VC): Funding for startups and small businesses with long-term growth potential.
• Growth Equity: Investment in relatively mature companies seeking capital to accelerate growth without a change of control.
• Lower Middle Market Private Equity: Investment in established, profitable businesses, often with EBITDA between $1 million and $10 million.
• EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization; a measure of a company's operating performance.
• Multiples: A valuation metric that expresses the value of a business as a ratio of its earnings, revenue, or other financial metrics.
• Discounted Cash Flow (DCF): A valuation method used to estimate the value of an investment based on its expected future cash flows.
• Financial Engineering: The use of financial instruments and strategies to achieve financial goals, often involving debt to enhance equity returns.
• Recurring Revenue: Revenue that is likely to continue in the future, often from subscriptions or long-term contracts.
• M&A (Mergers & Acquisitions): Transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated.
• IPOs (Initial Public Offerings): The first time that the stock of a private company is offered to the public.

Examples/Case Studies:

• Ambulatory Infusions: Miramar Equity Partners invests in businesses that provide ambulatory infusions, moving procedures out of hospitals to save costs for payers, offer convenience for patients, and allow for better data tracking by doctors, while freeing up hospital capacity.
• Pharmaceutical Businesses: Mentioned as an area of investment for Miramar Equity Partners.
• Tech-Enabled Services in Healthcare: Examples include solutions for more efficient sharing of medical records, aiming to make the healthcare system more efficient and provide better access to care.
• Construction Firm vs. Software Business: Used to illustrate the difference between non-recurring project-based revenue (construction) and predictable, recurring subscription revenue (software), highlighting the sustainability and strategic advantages of the latter.
• United Rentals (Hypothetical): A hypothetical example of a long-standing business relationship with a large client (United Rentals) that could be jeopardized by the retirement of a key contact, illustrating the risk of relying on single relationships for revenue.