Private Equity Firms Embrace Equity Financing for Addons Amid Challenging Debt Market

Private equity (PE) firms are adapting to a shifting financial landscape as they face mounting pressure to seek alternative funding options for add-on acquisitions. Concerns over rising interest rates and conservative lending standards have led to a stricter debt market, prompting PE firms to explore equity financing to support their investment strategies. 


In the past, when interest rates were low and lending criteria were lenient, PE firms enjoyed greater flexibility in funding add-ons. Utilizing existing credit facilities or layering incremental debt onto current liabilities were standard practices. Debt financing was often preferred as it maximized returns on acquisitions, with cash on hand being the last resort. 


However, with the current market dynamics, the feasibility of relying solely on debt has remained the same. Lenders’ risk aversion and existing covenants have limited the amount of debt available to potential buyers. As a result, PE managers are seeking alternative solutions to ensure the success of their add-on acquisitions. 


According to recent data, add-on acquisitions have gained prominence in PE, accounting for 78% of US buyouts in the first half of 2023. Nevertheless, the number of such acquisitions has declined compared to the figures in 2021 and 2022. The challenges posed by the debt market are influencing the decision-making process for PE firms. 


Many PE managers have shifted their approach to add-on financing to address these hurdles. Witnessing add-ons being fully funded with borrowed money has become less common. Instead, various financing methods are employed, including cash from the acquirer’s balance sheet, additional equity issued by the PE owner and co-investors, or a combination of debt and equity. 


By injecting more equity into add-ons, PE managers aim to manage the capital structure of platform companies better, ensuring compliance with credit covenants. This strategic shift allows the combined business to maintain a more manageable capital structure, providing a buffer to navigate potential economic uncertainties in the future. 


In the past, a typical add-on deal might involve leverage of 6x to 8x over EBITDA with 1.5x to 2x equity or even no equity at all. Today, PE firms are structuring similar deals with reduced leverage of 3x to 4x and allocating a more significant portion to equity financing. 


Nitin Gupta, a managing partner at Flexstone Partners, highlights that private equity funds are willing to inject more equity into deals they believe to be promising or offering considerable synergies. He explains that once the bank debt market reopens and conditions improve, they may readjust the capital structure and recoup some invested equity. 


Despite the benefits of equity financing, there are challenges. One significant concern for acquirers is the triggering of “most favored nation” provisions (MFN) prevalent in many credit facilities. These provisions allow lenders to reprice existing debt when new loans receive higher interest margins. This has made PE firms cautious about additional debt, which could lead to higher interest costs for the entire debt facility. 


The current debt market climate also reflects lenders’ tightening grip on borrowers. In the broadly syndicated loan market, the average debt-to-EBITDA ratio for loans issued in Q1 2023 declined to 4.7x from the peak of 5.3x recorded in 2021. This signals a more conservative lending approach, leaving less room for additional debt. 


Private equity firms are adapting their financing strategies to navigate the challenges of the current debt market. The increased reliance on equity financing for add-ons demonstrates their commitment to maintaining a healthy capital structure and complying with credit covenants. As market conditions evolve, these firms will continue reassessing their financing strategies to maximize investment opportunities while managing risk effectively. 


Unleashing the Power of Private Equity: The Executive’s Guide to Stand Out and Transform from Operator to Investor-Operator 

In the high-stakes Private Equity (PE) world, executives must distinguish themselves. However, standing out is not simply about demonstrating experience and expertise; it’s about portraying a proactive, investor-oriented mindset. Today, we examine key strategies to achieve this, including crafting a robust deal thesis, building an owner target funnel, and engaging with numerous PE firms. We also discuss the value of investing in industry conferences like those organized by Blackmore Connects and the transformative shift from a regular operator to an investor-operator. 


Creating a Deal Thesis: The Starting Point 

Every incredible journey begins with a single step; in PE, that step is formulating a solid deal thesis. This concrete, well-articulated business strategy conveys your vision and knowledge of the industry, outlining your plans to generate superior returns. Your deal thesis should demonstrate your ability to identify and capitalize on untapped growth opportunities while managing risks effectively. 


Building an Owner Target Funnel 

As an executive seeking to excel in PE, constructing an owner-target funnel is paramount. This involves identifying and engaging with companies ripe for acquisition, demonstrating an active, investment-centric mindset. The more expansive your funnel, the more likely you are to find the ideal investment opportunity. 


Establishing Relationships with 200+ PE Firms 

Private equity is an intricate ecosystem where relationships matter. By getting to know more than 200 PE firms operating within your industry, you understand the investment landscape comprehensively. It allows you to network with significant players, uncover emerging trends, and understand various firms’ investment criteria, ultimately positioning you as a knowledgeable and connected partner. 


Investing in Blackmore Connects PE Conferences 

With a commitment of roughly USD 20,000 annually, attending Blackmore Connects PE conferences is a significant but worthwhile investment. These conferences offer a platform to engage directly with industry leaders, share best practices, and explore potential investment opportunities. Connecting with like-minded professionals can further refine your deal thesis, enrich your owner target funnel, and broaden your professional network. 


Attending 6+ PE Conferences Annually 

Attending six or more PE conferences a year is not just about frequency; it’s about immersion. Consistent attendance lets you stay abreast of the latest developments, engage with fresh perspectives, and solidify your presence in the PE community. It’s an investment in continuous learning and networking that reinforces your dedication and commitment to the industry. 


The Importance of Industry Conferences 

While PE conferences are essential, industry-specific conferences should be noticed. These events provide a deeper dive into your specific sector, offering insights into your field’s unique challenges and opportunities. This enhances your industry-specific expertise, further reinforcing your credibility as an investor-operator. 


Transforming from Operator to Investor-Operator 

The shift from an operator to an investor-operator marks a significant transition. As an investor-operator, you’re not just managing the business but strategically investing in and growing it. This shift offers a substantial upside potential compared to conventional executive roles. It enables you to reap the rewards of increased enterprise value rather than just a salary, liberating you from the constraints of being a ‘wage slave’ and empowering you to build and share in the wealth you help create. 


The Blackmore Advantage 

Both Blackmore Partners Inc. and Blackmore Connects provide a measurable, repeatable process that significantly increases the likelihood of success while mitigating risks. Their methodical approach, combined with extensive resources and expert insights, empowers executives to navigate the PE landscape, fortifying their investor-oriented mindset confidently. 


Investing in yourself by establishing a robust deal thesis, building a target owner funnel, and actively engaging with numerous PE firms and industry conferences can yield significant dividends. The shift to an investor-operator is a journey that requires commitment and strategic investment, but with the proper guidance and a steadfast focus, the rewards are transformative. So, take that first step, invest wisely, and become the stand-out executive private equity firms want on their team. 

Vetting a company:

When vetting a company for private equity acquisition, due diligence is the key. This process typically involves assessing a company’s financial health, market position, competition, and growth potential. Here’s a step-by-step guide on how to vet a company for private equity investment: 


Define Investment Criteria: Start by defining the criteria for your investment. This should include the company’s size, industry, geography, growth rate, profitability, and other specific criteria relevant to your investment strategy. 


Sourcing Deals: Once your criteria are defined, source deals through investment bankers, business brokers, industry contacts, or direct outreach to target companies. 


Preliminary Analysis: Conduct a preliminary analysis of the company. This includes a high-level review of the company’s financial performance, market position, management team, and growth prospects. 


Initial Management Meeting: Arrange a meeting with the company’s management team to understand its vision, strategy, and goals. This will help you gauge whether the company’s management is competent and whether their objectives align with yours. 

Letter of Intent (LOI): If the company aligns with your investment criteria and the initial analysis is positive, prepare a Letter of Intent. The LOI outlines the terms and conditions of the potential acquisition, including the proposed purchase price, the deal’s structure, and the due diligence timeline. 

Due Diligence:This is a deep dive into the company’s operational, financial, and legal status. You should review the company’s financial statements, tax returns, customer contracts, legal issues, and other relevant documents. Hiring third-party experts (accountants, lawyers, consultants) can be beneficial at this stage. 

Financial Due Diligence: This includes a thorough review of the company’s financial health, including analysis of past performance, forecasted future performance, capital structure, etc. 


Operational Due Diligence: This includes evaluating the company’s business model, product or service offering, key personnel, customer relationships, supply chain, technology systems, etc. 


Legal Due Diligence: This involves reviewing any legal issues that may impact the company, including contracts, pending litigation, regulatory compliance, intellectual property, etc. 


Valuation: Establish a fair valuation for the company using methodologies such as discounted cash flow (DCF), comparable company analysis, or precedent transactions analysis. 


Negotiation: Negotiate the final terms of the acquisition, including the purchase price, deal structure, and financing arrangements. If necessary, adjust the valuation based on the findings from the due diligence process. 


Final Agreement and Closing: Draft and sign a definitive purchase agreement, including all the transaction details. Afterward, close the transaction and transfer funds according to the agreed terms. 


Post-acquisition Management: Finally, manage the company post-acquisition to ensure it achieves its growth objectives. This could involve various tasks, from restructuring the company to hiring new management, improving operations, or even preparing for an eventual exit. 


Remember, vetting a company for private equity acquisition is a thorough and potentially time-consuming process. It’s essential to have an experienced team of advisors, including lawyers, accountants, and industry experts, to assist with the process. 



Leveraging PE Conferences to Enhance Executive Performance and Reduce Risk in Managing PE Owned Companies: Unveiling the PE Voice of the Customer 

This paper explores why executives seeking to run private equity (PE) owned companies in the $3M to $15M EBITDA range should actively participate in PE conferences to gain insights into the PE voice of the customer. Investing in attending such conferences not only equips executives with a deeper understanding of the unique challenges and opportunities inherent in PE-owned businesses but also fosters better decision-making and risk reduction, ultimately reducing the risk of being replaced as company leaders. Additionally, the paper outlines the distinct mindset and actions prevalent in PE-owned companies compared to their non-PE counterparts. 



Private equity firms play a crucial role in the growth and transformation of businesses by acquiring and managing companies with the potential for substantial returns. Executives running PE-owned companies face distinct challenges, necessitating a different mindset and skill set than those running non-PE-owned companies. Attending PE conferences is an invaluable means for executives to gain the PE voice of the customer, grasp the intricacies of PE-owned business dynamics, and ultimately thrive in their roles. 


Understanding the PE Voice of the Customer: 

PE conferences offer executives a unique opportunity to connect with industry experts, successful investors, and seasoned leaders in the PE landscape. These conferences provide invaluable insights into the mindset and expectations of PE investors, offering a glimpse into the “PE voice of the customer.” By understanding investor expectations comprehensively, executives can align their strategic decisions with long-term profitability, capital efficiency, and growth objectives. 


Strategic Decision-Making for PE-Owned Companies: 

PE-owned companies often operate under a shorter investment horizon than publicly traded or non-PE-owned companies. Executives must optimize performance, streamline operations, and drive value creation within a relatively limited timeframe. PE conferences provide access to case studies and success stories of companies that have navigated these challenges effectively, enabling executives to learn from best practices and adopt winning strategies. 


Risk Reduction and Enhanced Leadership: 

Underperformance or failure to meet predetermined targets can lead to executives being replaced in the context of PE-owned companies. Executives who invest in attending PE conferences demonstrate commitment to their roles and a willingness to seek knowledge and guidance proactively. By staying updated with the latest industry trends and adopting proven methodologies, executives can minimize risks and increase their chances of success, thereby reducing the likelihood of facing termination. 


Embracing the PE Mindset: 

PE-owned companies often operate in a fast-paced, dynamic environment where agility, adaptability, and accountability are paramount. Unlike non-PE-owned companies, where decision-making processes may be more bureaucratic, PE-owned firms prioritize quick actions and results. Executives who attend PE conferences gain exposure to this distinct mindset, enabling them to align their leadership approach with the unique demands of PE ownership. 


Navigating the Challenges of Portfolio Optimization: 

PE conferences also shed light on portfolio optimization strategies, helping executives understand how to streamline and restructure businesses within their portfolios. Executives can learn how to allocate resources effectively, divest non-core assets, and identify growth opportunities to maximize returns and deliver shareholder value. 


Cultivating Investor Relations: 

Maintaining healthy relationships with PE investors is crucial for executives in PE-owned companies. Attending PE conferences allows executives to network with potential and current investors, fostering transparency and trust. Strong investor relations can positively influence funding availability and support during critical stages of growth. 



Executives responsible for running PE-owned companies in the $3M to $15M EBITDA range stand to gain significant advantages by investing in attending PE conferences. By understanding the PE voice of the customer, aligning their decisions with PE investors’ expectations, and adopting a PE mindset, executives can improve their company’s performance, mitigate risks, and enhance their leadership capabilities, ultimately reducing the risk of being replaced. Embracing the unique dynamics of PE-owned businesses will enable executives to thrive in this challenging and rewarding sector. 

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