Minority Liquidity: Great Way to Protect Your Downside, Retain Upside and Control

Despite the overwhelming number of investors/acquirers approaching companies these days, we feel it makes sense to call out an investment option that not a lot of funds employ, and many entrepreneurs may not know about.

Minority liquidity or a minority recapitalization is an equity investment by a private equity firm, where the use of proceeds is liquidity to shareholders vs. the monies staying in the business for growth. Not a lot of funds make these types of investments, as it disincentivizes owner operators to continue creating value with the same rigor as before, when the vast majority of their wealth was tied up in the company. Firms that make these investments pursue high growth, profitable companies, who do not want or arguably need a capital infusion into the business, therefore this may be the only way for the investor to get into such an attractive business.

Companies find this type of investment attractive as it allows shareholders to diversify their holdings by selling a minority of their equity, often 25-49%, at a favorable valuation, while retaining control of their business, and focusing on a larger exit 3-5 years down the line. In the interim, it gives owner/operators an ability to hedge against a downturn that can wipe out equity value (please note if a growth company becomes flat or down growth wise, valuations can be reduced by a material amount, as a whole category of growth-focused investors/acquirers will no longer be interested, and there may only be “value” type folks interested, which as their name suggests aren’t paying premium valuations).

In addition to owner operators covering their downside, companies bring on a private equity institution which will not invest unless they feel they can make 2-3x their money in 3-5 years, so they support growth and value creation in areas incremental to the current operations such as with finance, accounting, acquisitions, strategic direction, and preparing the company for an ideally much larger exit down the line.

We at HRC have not only been part of PE groups who make such minority liquidity investments, but have developed a robust network of firms where this is a standard practice, and can share more particulars as well as assess the fit for such firms and your company. Feel free to respond herein, to schedule a call to discuss.