A Primer on Non-Control Capital: A Large Class of Flexible Investors That Don’t Want to Control Your Company

A Primer on Non-Control Capital: A Large Class of Flexible Investors That Don’t Want to Control Your Company

By Billy Amberg

April 08, 2021

We will cover the following topics in this short blog post:

1) Business Owners and Private Equity – The Old Paradigm

2) What is Non-Control Capital? How Prevalent is it?

3) The 11 Primary Uses of Non-Control Capital

 

 

Business Owners and Private Equity – The Old Paradigm

For many Vistage members, there are few goals that rank higher on the priority list than leaving a legacy and securing their financial future. Among the higher ranked are the classic family, health, and faith-related goals. Unfortunately, this blog post will not help you in the faith department, but it could illuminate a relatively new path to the other goals through Non-Control Capital.

Non-Control Capital has not always been popular. In fact, the very name of this relatively new kind of investment capital is indicative of business owners’ fears of investors, usually Private Equity Funds, that buy controlling stakes of companies using some or no debt. These LBO (Leveraged Buyout) and Control investors, which have been growing extremely rapidly since the 1980s, have a reputation for bending companies (sometimes painfully) to fit their target return-on-investment criteria. Many of these investors deserve this reputation, many do not. Nonetheless, business owners generally tend to be leery of these investors due to the simple fact that they are giving up control.

Enter Non-Control Capital.

What is Non-Control Capital? How prevalent is it?

Here are a few quotes everyone should pay attention to as it relates to the growth of Non-Control Capital and how it has become mainstream:

“Often characterized as a middle ground between venture capital and change-of-control acquisitions, Non-Control Capital is now firmly established as a mainstream investment strategy. Non-Control Capital was a standout strategy in 2020, reaching the highest deal value on record despite the dip in dealmaking overall. The strategy notched $62.5 billion in deal value, up 8.8% from 2019.”

Almost all that deal value occurred in the middle market, where Vistage member businesses typically fall in terms of revenues.

“Private Equity firms are clearly warming to the idea of Non-Control investments. A greater proportion of Private Equity funds now target or are willing to target Non-Control investments.”

Around 75% of the Private Equity firms Corporate Finance Associates maintains relationships with have told us in the last two years that they are now considering Non-Control investments.

“The classic Non-Control Capital target is still founder-owned, with organic growth potential and a proven business model.”

How many of your businesses could be described like this?

The 11 Primary Uses of Non-Control Capital

Of the many reasons to take investment from a Non-Control Capital (NCC) investor, 11 stand out as the most useful to business owners:

  1. Growth: NCC Is used to organically expand a business. New hires. New facilities, etc.
  2. Acquisitions: NCC is used to acquire one or more competitors or to acquire new capabilities
  3. Partner/Shareholder Buy-Out: NCC is used to buy-out an inactive or retiring partner/shareholder
  4. Management Buy-Out (MBO): NCC is used for the incumbent management to buy most or all of the ownership from a inactive founder or executive
  5. Management Buy-In: NCC is used for an external, experienced executive to buy a business from one or more inactive owners and needs more capital to affect the investment
  6. Family Ownership and Wealth Transfer: NCC is used so that a junior generation can acquire most or all of the ownership, allowing the company to remain in family name
  7. Balance Sheet Recapitalization: NCC is used to change the debt and equity mixture to a more optimal capital structure
  8. Refinancing: NCC is used to replace one form or type of debt with another or paid off outright
  9. Senior Lender Enhancement or Transition: NCC is used to facilitate growth when a company has outgrown its bank’s lending capacity
  10. De-Lever Balance Sheet: NCC is used when a company has taken on too much debt to replace some or all with equity
  11. Owner Dividend: NCC is used to pay one or more owners a non-life changing cash distribution, typically to diversify the owners’ net worth(s)

Bibliography
(Pitchbook, 2020 Annual US PE Breakdown)
(Seacoast Capital Partners)