For established, growing investment firms seeking capital for objectives such as reinvestment, acquisitions or shareholder liquidity, there is far more capital available today than ever before. Financial institutions, aggregators, consolidators, angel investors, multi-boutique affiliate models, private equity, debt, and permanent capital options abound.
As the landscape of options has become so broad and often overwhelming, the optimal capital choice requires clarity and priority of objectives. For those for whom shareholder liquidity is the priority, initial valuation is far and away the most important factor. This is certainly understandable, as several industry segments (notably wealth management and alternative asset management) consistently command very high valuations for this purpose.
For others, finding the most helpful partner is the highest priority. Naturally, what is “most helpful” varies greatly. Often distribution or asset-raising assistance is a key driver. Are there sub-advised funds to be managed? Is there a centralized sales and marketing team to leverage? And what about the ability to help source acquisition and bolt-on candidates? That might extend to helping the seller enter new markets or geographies. Aside from growth, “helpful” can include bringing more functional resources to the table: technology, compliance, operations, HR, or balance sheet and “war chest” resources. Is the search for “helpful” more important than or equal to the quest for liquidity, if both considerations are at stake?
A third consideration is “fit.” This would include governance, the relationship (will it be enjoyable? irritating? exasperating?), and alignment of interests. There are many nuances to “fit.” Is maintaining majority employee ownership (or any material employee ownership) important, or would joining a parented superstructure make the most sense? Is an indefinite solution with no time frame or liquidity needs important, or is a short-medium term horizon with attached goals the preferred route? Are any financial structures strongly preferable—such as preferred arrangements, revenue share, bottom-line distributions, common equity/pro-rata, etc.? Will profits be distributed or reinvested?
Apart from bank debt, mezzanine or other pure financing options, the wide array of capital partners/investors and acquirers are evaluated on all these criteria. The balance (or imbalance) of valuation, “helpfulness” and “fit” are weighed; there are no automatic or assumed correlations between the three.
With these criteria in mind, how does permanent capital differentiate itself from all the other solutions? Three elements define the essence of permanent capital: duration, strategy and valuation.
Before we discuss the three elements, it should be acknowledged that the term permanent capital is fluid; it can be used in connection with any publicly traded investment company, long-dated PE funds with horizons over ten years, and on rare occasions, private investment companies with no defined investment horizon or specific capitalization goal, i.e., truly permanent.
Duration should be a critical factor to alignment; the permanent capital partner should never need to look for the exits at what may be an inopportune time or against the wishes of management. Further reinvestment in the business is not viewed through the lens of whether a holding is early or late in its life cycle, as a PE fund or time sensitive holding must. This will color if and how such reinvestment might be made (technology, acquisitions, significant hires, etc.).
On the subject of strategy, running a business with an infinite timeframe versus running one with a 5–10-year timeframe dictates strategy, period. Instead of considering acquisitions, growth plans, and significant shifts in how you run the business opportunistically and with only the long-term best interests of the company in mind, non-permanent solutions have fuses that have been lit and all such decisions need to be weighed against the length of the fuse.
On distribution in particular—adding marketing resources or joining a centralized sales and marketing platform—ideally, they would not be short-term decisions requiring quick payback (less than three years). An acquisition might be accretive day one, but marketing reinvestment/repositioning might take three to five years to be fully evaluable.
With regard to valuation, permanent capital has the benefit of being able to provide ongoing liquidity, growth capital, and other valuation support indefinitely. Therefore, prioritization of the seller is critical. How important are up-front dollars versus dollars over time for these myriad reasons? Permanent capital tends to look at valuation and value creation over a much longer timeframe and multiple cycles as opposed to immediate paydays and five-year value creation. Publicly traded permanent capital companies may produce greater valuation arbitrage for the seller (sellers’ value vs. the value of the entire entity), but that has proved to be inconsistent and highly variable. Some have, some have not.
Back to where we started: the seller’s objective. There are a dizzying array of options and checkbooks. While permanent capital is not inherently better than any other capital source, beauty is always in the eye of the beholder. For those who prioritize no artificial timeframes to impact decision making and the potential to create substantially more value over time, permanent capital stands apart from the crowd.