Any new CEO enters the job with big ideas, and John Maher was no different when he was brought in to River's End Trading Company (asi/82588) in December 2013. "We realized there were definitely opportunities to run the business more efficiently and position the business for growth," says the apparel veteran, who had previously spent 30 years at Land's End. "We knew that to position the company for growth down the road, we were going to require some additional capital."

Maher reached out to people he knew at GCI, a family-funded private equity firm based in Wisconsin. The deal came together unusually fast – just about a month. By last April, GCI had put in a capital investmentthat Maher says has allowed the Counselor Top 40 supplier to undertake a number of initiatives, from enhancing its Web and customer service capabilities to expanding its decoration services. Moreover, Maher adds, GCI has provided much-needed support for IT, HR and finances.

"It's been a tremendous resource," Maher says. "At the end of the day, we're not chasing our tails on a daily basis. We're trying to focus on the things that long-term will make River's End a leader in this space."

Such is the appeal of private equity (PE). Businesses receive capital to fund ambitious new endeavors or even facilitate their own mergers, as well as resources they can leverage to greater success. "Private equity is an attractive source of capital to help us grow the business at an efficient rate," says Marc Simon, who has overseen deals with three PE firms in his 14-year tenure as CEO of Top 40 distributor HALO Branded Solutions (asi/356000).

Capital Source

PE firms typically manage a collective fund for any number of investors, such as corporate pension funds or high net-worth individuals. The fund is invested directly into private companies. (It can also be a buyout of a public company that then delists and becomes private.) Unlike venture capital – which tends to fund startups with high-growth potential and little in the way of structure – PE is directed toward established companies whose performance can be optimized. It can save failing businesses that are squandering their potential, as well as growing companies ready to scale up.

"If a business was hitting on all eight cylinders with nothing else to tweak, they wouldn't be interested," says Terry Gallagher, president of Battalia Winston, a mid-size search firm that works closely with PE firms.

The goal of PE firms is simple: help their portfolio businesses grow to ensure a positive return on their investment. And there is a lot invested. Over 3,000 firms in the U.S. handled, on average, $133 billion per quarter in invested capital last year. Good investment opportunities are the lifeblood of these firms, and they are exceptional at identifying where their funds will succeed.

"We're looking for businesses where we can add value with capital and bring to bear our network of resources to add value," says Mike Oleshansky, a director in the Private Investments Group of PSP Capital Partners, which purchased HALO in 2012.

Attracting PE money can be an incredible lifeline for a promotional product company, but to do it successfully takes a tremendous amount of organization and discipline. In the typical 60-day run-up to a deal, firms like PSP require complete access to exhaustive amounts of data.  With Halo, "we sliced and diced the business about a million different ways," says Oleshansky. "We asked them questions and asked them to look at their business in ways they had never looked at it before."

That requires business owners to provide accurate information with realistic expectations, says Lee Duran, private equity practice leader with BDO, which assists PE firms with management of their funds and portfolio investments. Showmanship only goes so far before PE firms peek under the hood. "You'd be surprised," he says, "at how often people just kind of shoot from the hip and say inaccurate things about underlying revenue numbers, growth expectations, etc. … They lose credibility extremely quick."

What They're Looking For    

When gauging potential investments, PE firms want to see a consistent track record of success. A leading indicator they often look at is EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Unlike straight revenue figures, EBITDA can offer a clearer picture of profitability by removing influencing factors like financing or tax environments.

But it's not just about what a company has done, but what it can do in the future. There must be opportunity for growth. Earnings are extremely important, but Oleshansky cites a number of other significant factors for evaluating ad specialty companies: stability of vendor and customer relationships, processes to help understand what drives success, and a strong management team to shepherd the company into the future. Businesses that are too reliant on a single large customer or a key management figure (like a founder or past buyer) will prove to be too risky for equity firms.

All those factors must convince a PE firm that its investment will pay off, and often sooner rather than later. The typical length of an investment ranges between four and seven years. In the current market, firms are increasingly unwilling to ride out the long term without results. "Every time we take on a new private equity partner," says Simon, "I say to my management team. 'If these guys still own us five years from now, we haven't done our job.' "

PE firms want the companies in their portfolios to be successful – which usually doesn't mean standing by idly and waiting to recoup their investment. "We don't look for investment opportunities where we're just providing capital, where we're just silent investors and owners of the business," says Oleshansky.

Many PE firms have experts familiar with the promotional products industry and what it takes to be successful. They offer robust services to help their businesses; PSP offers strategic planning, management support and much more for companies in its portfolio.

Beneficial Partnership

In many cases, though, the involvement goes much deeper. "I would say the vast majority of private equity firms want control," says Duran.

PE firms typically won't get involved in day-to-day operations, but they will install new management teams and top talent who have experience growing businesses in rapid fashion. For PE firms, the changes are a necessary vehicle to greater success.

There are exceptions, of course. Maher from River's End says there is nobody from GCI who stays on site, and the only required interaction is a formal phone call once a month. Still, Maher doesn't hesitate to call when he can utilize the firm's support. "They're not looking to actively get involved in any of their businesses," he says. "They are there when I need them."

It illustrates the fact that, just as PE firms exercise their due diligence to find the best investment opportunities, so too can ad specialty companies choose the best partner to align with. "I would always counsel clients to not talk to one equity firm," says Michael Schwerdtfeger, managing director for Chapman Associates, which advises sell-side clients through the mergers & acquisitions process. "Instead, you create a situation where there's a market for your business and you talk to multiple potential buyers." By talking with various firms, you can negotiate the best terms, gauge involvement and identify the best fit based on the PE firm's personality and culture.

And the truth is PE firms are very hungry for deals. In the current economy, equity firms put a premium on growth – selectivity that has created a competitive marketplace with lots of buyers chasing a few good sellers.

But the pendulum has begun to swing, with American PE firms holding on to $750 billion in "dry powder" – money that the firms raised but have not invested, essentially burning a hole in their pockets. "There's so much capital on the sidelines these days that private equity firms have relaxed their standards as to the companies that they'll consider acquiring," says Howard Berkower, an attorney at McCarter & English, which represents private equity funds and managers. "That goes to size of acquisition targets as well as industry sectors. Even the bigger PE firms are looking farther downstream than they traditionally have because there's a market imbalance."

Quite simply, the conditions are never better to sell. "Right now," says Schwerdtfeger. "I don't know if there's going to be another year for M&A that will be as good as 2015." – Email: cmittica@asicentral.com