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What EXACTLY is private equity and how does it help with succession planning?

- John Mickelson, Managing Partner Midwest Growth Partners, is IowaBiz's new blogger on succession planning. Read more about him here. 

Outside of major financial centers, the image of private equity is usually associated with a pop culture reference and that connotation is typically negative. Think of Richard Gere in Pretty Woman breaking up a family business or political ads accusing Mitt Romney of cutting company health care. 

While the private equity industry has bad actors just like every industry, these perceptions are generally unfair and the private equity industry – especially the type of private equity funds in the Midwest – provide a critical function to orderly business succession planning. 

At its core, private equity is simply another asset class that investors can invest in to diversify their portfolio. Most private equity funds are a pool of capital made up of dollars from pensions, trade groups, foundations and, to a lesser extent, wealthy individuals. 

Through these vehicles, many people are invested in private equity and may not even know it. The pool of capital in a fund is managed by a fund manager who seeks out investment opportunities in private companies whereby the fund becomes the owner of part or all of that company. 

Private equity is different than venture capital and public equity. Unlike venture capital – which invests in start-up companies – private equity invests in established companies that are seeking capital for succession or growth.  As a result, private equity does not seek huge investment wins with the expectation of a majority of its investments failing.  Rather, private equity seeks stable, predictable cash flow. 

Likewise, unlike the publicly traded equity market (like buying a share of Principal), the market for private companies is illiquid and inefficient.  This creates challenges in finding good investment opportunities, but also a unique chance to own profitable private businesses that investors typically could not access with their own time or capital unless they invested via a fund.  

John.mickelson@mgpfund.com

515-421-4803

www.mgpfund.com

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