Private Equity Players

Banks (and other lenders, to a lesser extent) are a second source of funds for private equity firms. A private equity firm might pay 30 to 50 percent of an acquired company’s purchase price in cash from its funds. The remainder usually comes from bank loans taken out by the firm.

Private equity funds often set minimum investments of $10 million or more, so most investors are institutions: pension funds, insurance companies, college endowments, banks.

Private equity groups are sometimes confused with venture capital firms. The difference, says Cary Musech, founder and managing principal at Minnetonka-based private equity firm Tonka Bay Equity Partners LLC, is that that venture capital invests in companies that “are typically not profitable yet,” he says. “They’re swinging for the fences.” Private equity firms, by contrast, “invest in established companies with established products and markets. They have revenue and are profitable,” Musech says.

A Hot Market

The private equity market saw three quiet years during the recession that began the current decade. In 2003, however, the private equity market began to grow by leaps and bounds. “In my practice, 2001 was slow and 2002 was dead. In the second quarter of 2003, it was like someone turned on the spigot,” says Bruce Engler, head of the mergers and acquisitions group at the Minneapolis law firm Faegre & Benson, LLP.

During 2003, U.S. private equity companies broke previous records by spending just over $94 billion to fund 538 deals, according to the January 2006 issue of the industry magazine Buyouts. That record was broken in 2004, when private equity groups spent $136.5 billion on 752 purchases and was shattered again in 2005, when private equity groups put $197.8 billion to work on 845 transactions. In dollar terms, the 2005 numbers represent a 44.9 percent increase over 2004. The 2005 total is also more than twice the amount of money spent in 2003 and more than eight times the amount that private equity groups spent in 2001.

The local market reflects the national activity. “The Twin Cities is a hotbed of private equity,” Engler says. At least 20 private equity firms call the area home, in part because the Twin Cities has banks, legal firms, and large financial institutions that the private equity groups need to support their deals. Existing private equity firms also tend to spin off smaller firms, which increases the number of local groups. “It just feeds on itself,” Engler says.