The venture capital market has seen a long-term expansion in the number and types of investors seeking minority (non-controlling) investments. Increased competition for investment opportunities and a greater diversity of competitors in these markets has created new opportunities for growing companies across a broad range of industry sectors, but also new challenges for investors.
Private equity firms are diversifying their investment strategies
Financial investors, especially private equity firms, regularly turn to debt to expand their influence and boost returns on capital. But with high interest rates showing little sign of abating anytime soon, the cost of this debt makes debt-financed acquisitions less attractive. Moreover, an uncertain market outlook has these companies seeking additional protection against downside risk.
As a result, private equity firms are partnering with co-investors more frequently and asking sellers to take more equity in target companies. Firms that traditionally targeted buyout options are doing more majority recapitalization transactions rather than relying on earn-outs to close valuation gaps, and majority recapitalization firms are starting to focus more on minority investments. The shift toward minority investments allows private equity firms to further diversify their investments and mitigate the potentially large downside scenarios of majority recapitalizations.
