Founders & Owners

Basically, PE refers to investing in companies who are not traded on public exchanges.

PE firms like New State raise money from long-term investors, including pensions, endowments and foundations. These institutions invest in private, closed-end funds. Unlike a public stock which can be sold on any day, their investments in PE firms like New State are long-term commitments.

Against the backdrop of having long-term capital, PE firms like New State can invest in companies which they think will grow over a multi-year horizon – say, five years or longer. When it’s time to sell, the PE firm must find a buyer for its stake, or for the whole company. Or it might bring the company public, after which it will trade on a public exchange.

During its ownership, the PE firm can support business decisions to optimize over a longer period. This runs in contrast to a public company, which might be more focused on quarterly results.

Because the ownership horizon and exit process are long-term, it is critical that the limited partner commitments are matched to be long-term.

All this said, there are many varieties of private equity investing across thousands of firms.

Yes. Typically, private equity invests in established companies. For example, New State seeks companies which generate at least $8 million of annual cash flow for its equity investments.

By contrast, venture capital typically invests in earlier-stage start up companies.

Yes. A hedge fund structure typically allows its investors to redeem their investment over shorter periods. This requires the hedge fund to invest mostly in securities which can be sold more quickly.

Yes. Typically a family office refers to a single wealthy investor who invests directly into transactions. The wealthy family hires investment professionals to identify and make investments directly into companies, rather than – or in addition to – investing as a limited partner in a private equity fund. A family office might have a different financial outlook or time horizon than a traditional PE fund.

Mechanically speaking, the PE firm draws capital from its limited partners and acquires shares in the company.

The PE firm could buy “primary” or “secondary” shares.  If the shares are “secondary”, it means that the PE firms bought shares from an owner who sold to the PE firm. In this case, the PE firm transfers cash to the seller who in turn transfers the shares to the PE firm. If the shares are “primary”, it means that the PE firm is acquiring newly issued shares by company itself. In this case, the PE firm transfers cash to the company who then has cash on its books. 

Typically, PE firms seek alignment between owners and managers by granting management with stock options.  This allows the management team to participate in the equity value creation alongside ownership.

While there are many structural approaches to this basic concept, New State prides itself on being straight forward. For example, we typically do not include a preferred rate of return ahead of management.

This nomenclature can be confusing. Typically, an Initial Indication of Interest (an “IOI”) is an initial thought on valuation – how much the PE firm is willing to pay. It is based on a limited financial information. The IOI is helpful to a seller to assess if they are even in the right zip code on approximate valuation and serves as the basis to continue to meet and share information. The IOI is almost always non-binding.

A Letter of Intent (or “LOI”) is based on more detailed information and more access to company management. Typically the LOI will be more specific on value and structure. The LOI should also identify threshold due diligence questions and even certain terms that would be reflected in the definitive legal documents needed to transact. While an LOI is also typically non-binding in that it doesn’t commit a PE firm to make an investment, it might have certain binding provisions. For example, an LOI might provide for an “exclusive period” where the buyer and seller agree to work with each other towards a transaction.

Due diligence simply refers to the investigation into a company that a PE firm must do before committing to an investment.

Investors in PE funds invest as “limited partners”, which simply means that they are financial investors but not active day-to-day.  These long-term institutions might allocate 10 or 20 percent of their total capital to PE. (By the way, when we say “capital” we mean “money”.) A balanced portfolio might include public securities (e.g., stocks and bonds) as well as alternatives (e.g., PE, real estate, hedge funds and venture capital).

The general partner manages the funds on behalf of the limited partners.  This “GP” is what you typically think of as the PE firm.  The GP will also invest its own money alongside its limited partners.

Traditionally, PE firms borrow some of the purchase price. Like buying a house with a mortgage, a reasonable amount of leverage can make sense.

However, leverage can negatively impact a seller if the financing falls through.  Or it can hurt the business if it is over-leveraged post-closing.

We believe that New State is more conservative with leverage than typical PE firms. By taking on less debt, we offer greater certainty to close. In certain cases, we will even waive any financing condition. Moreover, we leave the businesses with more flexibility post-closing.

This term refers to a previous owner who continues to own a stake in the business after a partial sale to a PE firm.  For example, if a Founder/Owner owned 100% of the company and sold 70% to a PE firm, the “rollover equity” would be 30%.

• The U.S. Federal Government created legislation to encourage companies to more broadly distribute ownership through employee stock ownership plans (“ESOPs”)
• An ESOP is a type of employment benefit that enables employees to own part or all of their company
• An ESOP is established when a business owner sells some or all of their shares to an ESOP trust, which then owns the shares on behalf of the employees and credits individual participants’ accounts as contributions are made to the trust by the company

• Tax-exempt corporate structure increases company free cash flow
• Employees of ESOP companies are proven to have significantly more retirement assets vs. employees not in an ESOP. Most ESOPs require no out-of-pocket contribution from employees.
• Increased motivation, productivity and retention which lead to company growth and further wealth creation for the employee ownership group