Understanding Capital Market Firms for a Successful Transaction

Many capital market firms work with companies on transactions – but figuring out the differences of each firm and their roles and services can be tricky. Major firm categories include Investment Banking, Private Equity and Venture Capital. These terms are often mistakenly used interchangeably, and understanding their differences is crucial for company owners looking to make a transaction. Use this list as a guide to finding the right type of firm for your company.

Investment Banking Firms (Advisors)

Investment bankers are advisors to owners and boards of established companies. The typical client of an investment bank generates revenue in excess of $15 million. Investment banks provide guidance to these owners and help complete a transaction – whether it be selling the company or a division, buying a company, or raising and/or restructuring debt or equity. Investment bankers will work closely with companies to:

  • Define the needs and strategy of management, shareholders, creditors and Board members
  • Prepare the company for comprehensive due diligence
  • Prepare the firm’s story and financials for presentation to counter parties
  • Market the opportunity
  • Source and secure multiple buyers and sources of funding (including from banks, debt providers, PE and VC firms)
  • Negotiate with interested parties, creating a competitive dynamic amongst firms to ensure optimal terms for the company
  • Collaborate with the company’s advisors
  • See the transaction through to conclusion

Private Equity (PE) Firms (Investors)

PE firms buy minority or majority positions in established, profitable companies. They focus on larger, more mature firms that want to sell some or all of their business to create liquidity for shareholders or facilitate a succession plan. Capital received from a PE firm can also be used to fund organic growth and acquisition. There are many types of PE firms. They differ based on industry specialization, types of transactions they prefer, whether they are control or non-control investors, geographic preference and whether they use equity and/or debt to complete transactions. PE firms often require board representation and, in limited situations, will recommend new additions to the management team. Their ultimate goal is to be an owner of the company for 5-7 years, be a valuable contributor as a Board member and help grow the business before selling it again.

Venture Capital (VC) Firms (Investors)

VC firms aim to invest at earlier stages in a company’s lifecycle, focusing primarily on highly innovative and differentiated technology and life sciences companies. They look for high growth companies that are poised for further significant growth. Funding from a VC firm comes with a higher cost (dilution) due to taking significantly greater default risk compared to a PE firm investing in more established companies. Like PE firms, VCs also receive ownership in the company and board representation in exchange for their capital.

The biggest difference between Investment Banks and PE / VC firms is that Investment Banks are advisors, not investors. Investment Banks do not invest in companies; PE / VC firms do. Investment Banks have significant relationships and access to PE / VC firms, along with other capital providers, buyers and targets. Companies engage Investment Banks to tap into their network of potential investors and negotiate an optimal transaction.

While some overlap does exist between each of these three firm types, there are significant differences that set each of them apart. When considering a transaction, use this knowledge to seek out the right kind of assistance and to ensure a smooth process from start to finish.

Author: Mike Anderson

About Bridgepoint Merchant Banking

Bridgepoint Merchant Banking, a division of Bridgepoint Holdings, LLC, is a middle market investment banking firm with offices in Omaha, Des Moines, Lincoln, and Denver. The Bridgepoint team, through their broker dealer relationship with M&A Securities Group, an unaffiliated entity, serves clients over their corporate lifecycles by providing merger and acquisition, capital raising, and strategic advisory services. Bridgepoint Principals have completed more than $158 billion of M&A, corporate finance and advisory services transactions over their careers.