Founders & Owners

Since our founding in 2013, New State has invested in more than 25 founder owned companies

This is what we do.  Investing with founders requires a patient, partnership approach.  We have learned that partnering with founders can be win-win, as contrasted with buying other institutions.  Among other differences, New State’s selective strategy means that each investment is critically important, as contrasted with the portfolio approach of larger PE buyers.  Dive into Private Equity 101, or reach out to begin your partnership with us.

What founders are saying

AVEX has been my life’s work, so selecting the next owner of the business was not a task I took lightly. 

From our first interaction, New State clearly stood out as the best partner for AVEX. They were absolute professionals, acting with integrity at every step. I am truly excited for them, as well as for our customers and the team at AVEX.  I am quite confident of their future success.”

Private Equity 101

What is private equity in simple terms? How does it work?

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.

Is private equity different from venture capital?

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.

Is private equity different from hedge fund?

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.

Is private equity different from a family office?

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.

What happens when a private equity firm acquires a company?

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. 

What about management stock options?

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.

What is a Letter of Intent versus an Initial Indication of Interest?

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.

What is due diligence?

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

What is a limited partner versus a general partner?

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.

What is a leveraged buyout?

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.

What is the PE firm’s role post-investment?
Typically, the PE firm’s involvement is limited to its participation on the Board of Directors.  In addition to PE representation, the “Board” might also include directors who represent other ownership groups, such as if the Founder/Owner continues to own part of the business. Management reports to the “Board”.  When PE firms like New State say that they have operating expertise, they typically mean that the PE members on the Board have perspective to offer from prior experience in operations.
What is rollover equity?

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%.

What is an ESOP?
  • 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
What are the benefits of an ESOP?
  • 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