How to Raise $10m During A Recession – Natu Myers of Raises.com
I have one. Not to my minus here again, back with another video. And in this video I’m going to talk about the key things to look out for when selling your private equity deal during a recession. Bear in mind that at the time of the recording of this video, technically we may or may not be in a recession, but everyone thinks that we are, and there definitely are signs to be concerned about. But this is not a macroeconomic video. This is more of a video to tell you what to really what how to sell your private equity deal efficiently when people are really skeptical and when the market doesn’t show good signs of growth. So the first thing is really I guess there are four elements, you know, during so I guess looking at historically, looking at the types of industries, the types of companies, the types of things that happen during a recession or during market downturn when there’s a lack of growth, really, there are several industries that boom, you know, these industries include debt collection. So any business that’s associated with debt collection, unfortunately, businesses or things that are associated with crime. So I guess law enforcement’s, you know, prison stocks, things like that, potentially. There’s more optimism there. And when it comes to use used, I guess, use machinery, even used automobiles, anything that is like on the secondary market for in terms of like large types of machines, second hand tends to boom as well. (recession 2022)
And so in light of, you know, just people having less capital that they’re willing to spend. There are several things that people look for when they’re looking to invest in a potential financial partner. And I guess the key thing is people, industries, people, they just tend to lay off a lot of their lot layoffs. And usually these layoffs come because people are these entities and companies, a lot of them are just focusing on their core competencies. They’re not focused on extra periphery, periphery, things that may not be of use or have benefited right this moment, but more things that are not really that serious, that are kind of like a I’m not sure if I want to do this. So with that, what people do, they when somebody is starting a private equity fund in a for example, let’s say they’re doing a mergers and acquisitions private equity fund, and let’s say that they want to acquire HVAC companies, right? So HVAC is just a special type of heating ventilation, you know, air conditioning and things of that nature. So somebody wants to acquire a bunch of these companies and let’s say the person was in that industry for about 30 years. Right? And let’s say that the fund, maybe 80% of the money that they raise from investors will go to these HVAC companies to be acquired. (recession 2022)
And let’s say 20% of the money that they get from investors will go to, you know, pre IPO stocks to make sure that it goes to value. The value of the of the portfolio can go up pretty asymmetrically. So but then the person and the team behind the fund let’s say that they had zero experience in pre IPO stocks or maybe just five years of experience in the IPO stocks but then let’s say in HVAC, they had probably decades of years of experience. So when it comes to people being less optimistic, I mean, it’s the hypothesis would be that it’s more of a hard sell to entice people to come in to work with you, for you to deploy capital to something that you have no experience doing. Because what prevents that investor from just using that money to invest in their own pre-IPO stocks? Because they may have a team that has more experience that focuses on that rather than you choosing to take their money and invest in pre IPO stocks where you’re the expert in HVAC rather than pre IPO stocks. If people were optimistic they may have some more discretionary like spending or discretionary investing know. But when people are skeptical, people tend to just shrink down to their core competencies, to the few things that they’re good at and cut off all the fat’s in terms of recession and lean outs. (recession 2022)
So if something is not your core competency as a generality, it may be more smart and productive to just make sure you focus on just talking about things that you’re that you’re competent in and that you have experience in. But when it comes to things that are outside of your scope, of your circle of competency, those things tend to be a harder sell. They’re in recession, number one. Number two, when it comes to the distribution, you know, because during different private equity funds and indications and deals in mergers and acquisitions and real estate needs, some people, they get really aggressive when it comes to how many fees that they can get. And bear in mind that so many funds, you know, barely any of them can beat the returns of the S&P and the ones that do really they don’t, many of them because of the fees that the general partners take or the fees that people take in exchange for helping investors raise more money. So what can. Happiness as people are helping people raise money and then they’re getting into this. You know, another thing to be careful for is just being too greedy on the general partner, on how much general partner would take in a deal. And when investors are already skeptical, they’re already, you know, in a defensive and maybe you’ve pitched them something that isn’t in your core competency and you also want to take more fees from them. (recession 2022)
People may be a bit more sensitive to that. So just even just by considering lowering your fees a little bit, that’s the easiest way to do it. Another way to do it is to just make sure that you can have something called a capital call that’s, you know, more spaced out so that the the schedule by which you take capital from an investor may be more spread out such that they feel more comfortable to say yes in that first go And then when you see a deal that is really nice for them to for you to acquire and for them to make money on, then they’re more they’re more maybe more framed in a better position to say yes, perhaps come more economic growth. So you could spread out the risk in terms of the times that you call capital from people. You know, that’s number two. Number three, I guess also not just the not just the amount that you take from investors, I guess even the the waterfall, the order by which you take money, the order by which you distribute money, the distribution waterfall. If you have a private equity fund set up, you know, you can give to the investors first. That’s the European style. (recession 2022)
You can give the investors first if you want. See what the market reacts to. Because if you tend to give investors the hypothesis here, the guess here is that if you give investors no reason to feel that there’s a risk in working with you by them getting as much capital as they can in a way that allows you to operate as a business, but at the same time lowers and removes all risk and reverses all risk. Then you’ll be able to say, Hey, listen, take this, take this, take this nice distribution here for you. You know, And once you’re able to do all that, you know, you can also look at ways to limit the amount of increase, the amount of liquidity they have to give more exit options for them and to make sure that, you know, because that they have different options when it comes to them, you know, benefiting from cash flows and benefiting from capital appreciation. So I guess that’s the last point, because if the investors, you know, are making cash and they’re getting income because cash flow tends cash flow investments, investments that generate yield generate a consistent cash flow, especially during times when the interest rates are going up, those things can be really appealing because people would be less optimistic about capital. I mean, they would be optimistic about capital appreciation. Obviously, after a recession, like the value of if you want to sell the deals that you’ve purchased for an investor will go up after recession. (recession 2022)
So obviously that’s that will happen. But again, during recessions, people are just more skeptical. So another way to remove skepticism is just to emphasize on cash flow. Make sure that when you buy the thing, buy the whatever HVAC deal or whatever deal that you want to on behalf of the investor, then it’s generating cash on day one rather than it being like an early stage development. And then they have to wait like five years before to even see a dime. You know, if you couple that with many good exit strategies, maybe you’re going public, maybe you’re going to sell off to somebody, maybe you’re going to roll it up in another fund. If you combine those two in addition to the first two things that I mentioned, then the investor will most likely be in a position where they say, Hey, listen, there’s almost no risk on this deal even during times of an economic downfall. So I wouldn’t be in a position where I’m too scared to even work with this guy so or gal, because they’re obviously guys in this industry as well. And so with that, like, that’s pretty much it. So number one, stick to your core competencies, remove extra the extra frills and the fluffs. (recession 2022)
Don’t invest in like vineyards and random stuff if you haven’t done that so before, just stick to what you know because what makes you think that an investor would work with you doing something you don’t know? When they can just hire somebody to do that, which you don’t know better than you do, as opposed to you just focusing on the thing that you’re good at and the thing that nobody in the world can do. Because the number one way, one of the number one ways to hack this, this whole to build value for yourself is just to be irreplaceable. So don’t. So if you go into something that you don’t have experience doing to the same extent that is replaceable by what an investor choose to invest their money with you, if you’re not sure, you can beat the S&P. So that’s number one. Number two is just to understand that, you know, people get more skeptical. So you want to make sure that people have you know, when people invest, you know, people are seeing that there’s a lot of upside, that there’s a lot of very low risk and that you’re reversing risk for them. So making sure that, I guess, in addition to number three, making sure that the the term by which they’re investing. Doesn’t have to be that long, making sure that they get as much capital as they can, making sure the order by which they get capital is advantageous to the investor. (recession 2022)
And on the third point. Making sure that your size and cash flow that you’re not investing in some early stage stuff that is pre not pre IPO, that is not cash flowing and you have to wait like half a decade for you to even see a penny from it. If they make sure if you make sure that your reverse got reverse all risk that there’s cash flow that you’re invested in your core competencies and you’re irreplaceable in the industry, there’s no reason why somebody wouldn’t want to work with you. And so with this, when you combine all these three things during the recession, look to make sure that you give people hope and and especially depending on how experienced the investors are, because definitely the smaller the investors, the more persuasive that you can be from a sales perspective. But in a more sophisticated and expert, the investors are you know the more you just have to be know your stuff and you can’t use gimmicks. So with this, I hope this makes some sense to you. And if you’re looking to get this done, get all your deals set up in two weeks and then actually hit the markets, get investor appointments, head to raise XCOM, because that’s what we do. But with this, we’ll see you in the next one. (recession 2022)