Raise Capital To The Sky
So I received many comments from all of you following my last couple of posts regarding raising capital. Well, they are pretty basic, like, “how do you raise capital?”. And of course what this means is that not everyone has a lot of capital, otherwise they wouldn’t be doing leveraged buyouts? No, that’s not right either. Even if we have capital we don’t have enough capital.
Private Equity raises capital even if their partners are rich. So literally everyone may be in a position to need capital for deals. Every so often I have done a deal with just bank or lender financing, seller financing and absolutely no other capital – meaning none of my own money. It takes some time and a lucky hit to pull off a no money downer so I will recommend that buyers be very careful about how they spend their time. No money downers should not necessarily be your first priority. Closing a deal should be your first priority.
Thus a certain amount of your time should be allocated to raising capital, even if you do not have a deal to fund yet. The process of raising capital, be it debt or equity, is pretty much the same across the board. You need to have a network of potential investors that you have at least talked to and qualified ahead of time. Then at least they are acquainted with you when it comes time to present the deal to them.
Some buyers will not lift a finger towards gathering capital sources until the deal is 30 days from closing. And indeed there have been times when I had absolutely no connections to capital and had to scramble around for money at the last minute. It can work that way. But it isn’t the best use of your time to never talk to capital sources until the last minute. Up to 50% of your time should be spent cultivating capital sources ahead of time, both debt and equity.
What do you do with this time? Well you can pound the pavement yourself or you can network your way to capital – which is much better. You will even find deals along the way. Aside from the many internet sites and databases dedicated to raising capital the process of reaching out to colleagues of all varieties is one of the best ways to plug into both individual and institutional capital.
I have had long time associates that habitually trot up and down New York City streets just to meet the financial guys and grab referrals towards little known pockets of capital. The capital is everywhere – it just doesn’t come to your doorstep. The point is that there are all sorts people besides yourself that are very good at networking for capital. Debt and Equity placement agents, for example, deal with equity sources big and small. Loan brokers as well. Private individuals, especially those that need a job that can tap capital or even be a source for capital.
The Wall Street Trot: Don’t Bother
At the same time I have had partners that have worked Wall Street Institutional capital for years, have been totally frustrated with the rejections and gave up. Raising capital is a numbers game and you need to dedicate a certain segment or your networking towards cultivating it. The best sources are simply NOT big PE firms, broker dealers, pension funds and other Wall Street type outfits. Those are big sources for big players. I have seen plenty of useful capital sources come in the form of family members, friends, relatives, operating partners, small passive investors, sellers, brokers and of course the usual compliment of private loan and equity shops.
I want to point out that you do not need to raise big numbers. Tiny capital can control big deals. I have seen $5.0 Million deals done with little equity slivers of $100k behind a significant mezzanine hunk of nearly $2mm that supported the structure. Even modest capital amounts can close a decent sized deal. Admittedly the exception but it can go to show how motivated players will get a deal done any way possible.
