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By Adam Antoniades, CEO, Cetera Financial Group
Not all private equity firms are created equally and not all debt is the same. But the right private equity partner, with the right investment thesis, can design a capital structure that helps their portfolio companies take advantage of the opportunities that arise from market disruption.
‘Smart Money vs. Hot Money’
A carefully thought-out PE investment strategy considers several factors when contemplating which companies to add to its portfolio. An investment thesis that considers time of entry, market volatility and a longer-term view is key. While hot money looks for opportunities to cut cost and flip a profit, smart money focuses on growth. These growth-oriented private equity firms have the discipline, cash and liquidity to weather market turbulence and prepare for the subsequent growth opportunities. Having a seasoned, well-established PE firm that can provide access to capital can often accelerate an organization’s ability to capture market share and drive growth.
Growing Influence of PE
In recent decades, an increasing number of companies have elected to stay private and raise capital through private means, eschewing the traditional IPO as a source for funding. In 1996, for instance, publicly traded companies numbered about 7,400; by 2017 that number dropped to roughly 3,600. At the same time, global PE dry powder has grown steadily and entered 2020—before the full impact of COVID-19 set in—with $1.5 trillion waiting in the wings. In the U.S. alone, PE fundraising reached a record of $301.3 billion last year and was expected to exceed $200 billion in 2020. This level of accessible capital is a game-changer for private companies seeking stability while pursuing long-term growth.
Although uncertainty appears to be the pervading force in today’s markets, firms with well-aligned PE ownership generally have three distinct advantages as they navigate the challenging environment: stability, liquidity and viability.
Stability in Rocky Markets
Private companies are, to a degree, insulated from wide market swings and tend to experience less disruption to their business strategy and operations. Moreover, private companies have the luxury of quickly adapting to market conditions and making key business decisions in the best interest of long-term growth, bypassing heavily regulated financial reporting and widespread public scrutiny that can both increase cost burdens as well as costly delays. This level of autonomy and stability can allow businesses to maintain focus on their mission and their clients.
Reward and Risk Around Liquidity
A private company’s stability is bolstered by the liquidity that a PE relationship can provide. Of course, for those who are stakeholders in a private organization, short-term liquidity is often sacrificed as their investment can’t be converted to cash as quickly or easily as public stock. That same liquidity of public stock, however, can introduce extreme volatility to a company’s stock price and impact management’s focus. For instance, capital ratios can reach a critical point triggering the issuance of more stock to raise capital, which can result in equity dilution and an even lower share price. Additionally, public companies are required to report earnings quarterly and annually, which is critical for transparency, but can introduce a tendency to emphasize short-term gains rather than the long game.
Pursuing Long-Term Viability
Most companies are in it for the long term and are seeking to inspire confidence among their clients. PE-backed firms with a nimble capital structure may have an easier time instilling that confidence amidst uncertainty, as capital infusions do not depend on unnerved investors in the public market.
Often, these PE-backed companies have not only a flexible debt structure that allows them to maintain their position, but they can rely on patience from their own equity investors, who are equally committed to achieving the business’s long-term goals and objectives. Among private firms, a level of certainty in their PE partners trickles into other areas of their business, providing clients with assurance that the business remains solid and viable.
Cetera Moves Forward with PE
At Cetera Financial Group, we turned to a private equity ownership structure in October 2018 for all the reasons outlined above and more. We are as confident today as we were over a year ago that a PE relationship was the right structure for our business and our stakeholders. We strategically aligned with Genstar Capital to focus on organic expansion for our organization and our affiliated advisors, positioning ourselves to be able to meet our long-term growth objectives.
Today, we continue to move forward with the partnership of Genstar, enabling our advisors to focus on the important task of guiding their clients through unchartered waters while we provided uninterrupted support and access to the technology, service and wealth management solutions so critical at this time. Our advisors can focus fully on their clients’ needs, while we—with Genstar—continue to innovate through a tumultuous time.
About Cetera Financial Group®
Cetera Financial Group (Cetera) is a leading financial advice firm. It empowers the delivery of an Advice-Centric Experience® to individuals, families and businesses across the country through independent financial advisors as well as trusted tax professionals and banks and credit unions. It’s headquartered at 200 N. Pacific Coast Highway, Suite 1200 El Segundo, CA 90245-5670.
Comprehensive services include: wealth management solutions, retirement plan solutions, advisory services, practice management support, innovative technology, marketing guidance, regulatory support, and market research.
"Cetera Financial Group" refers to the network of independent retail firms encompassing, among others, Cetera Advisors LLC, Cetera Advisor Networks LLC, Cetera Investment Services LLC (marketed as Cetera Financial Institutions or Cetera Investors), Cetera Financial Specialists LLC, and First Allied Securities, Inc. All firms are members FINRA / SIPC.
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