The Main Types Of Private Equity Strategies

This wouldn’t be a technical private equity blog without a rundown of private equity strategies. This is staple reading elsewhere, but the fact I’ve left it this late is probably an indication of how important (or unimportant) it really is. OK, I’m not saying what follows is complete dross, I just don’t think there’s a need to harp on about classifications. After all, private equity strategy is more about actionable initiatives than classifications and words.

  1. Management Buyout (MBO): this is the renowned buyout model from the boom in the ’80s, although they called them Leveraged Buyouts (LBOs) then. It simply means that the management team in a business buys the business from the existing owners with support of private equity.
  2. Management Buy-in (MBI): this is very similar to the MBO, except a manager or management team from outside the company purchases and manages the business. In some respects, this entails more risk than an MBO because the new managers are foreign to the intricate details of the business.
  3. Buy-in Management Buyout (BIMBO): this term allows the word “bimbo” around the office without the threat of a harassment lawsuit. Seriously though, it is just a combination of an MBO and MBI, where managers from inside and outside the company unite as investors.
  4. Public-to-Private (P2P): this is the purchase of all publicly listed shares in a business to have it delisted from the exchange and classified as “privately owned”. Often there are perceived benefits in escaping regular public scrutiny and the requisite reporting, hence the motivation to do a P2P.
  5. Secondary Buyout: this is the purchase of an investee business from another private equity fund, either because it has outgrown the fund or because the selling fund doesn’t see value in keeping it. In rare cases, it can also involve buying a business from a fund managed by the same firm.
  6. Growth Capital: this is the investment of new capital as new shares into a business to facilitate growth. In a pure expansion deal, the existing shareholders stay on the register and 100% of the invested funds (less fees and costs) enter the business as cash.

In practice, most deals are hybrids of some of the above and even within each of these categories there are many sub-strategies. As I’ve said before, this is more classification than strategy. What matters more to private equiteers is actionable initiatives that move the needle on the Core Drivers Of Returns and the skills and tools we need to implement them. But that’s for another post.


Dealmaking, Strategy

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