NEW YORK (CNNMoney.com) -- Private equity firms have come under fire for pursuing big, mostly public companies in the hopes of striking it rich quick. But overlooked amid all the criticism are signs that they've also been helping to support a pillar of the U.S. economy: family-owned businesses.
More closely-held family companies are turning to private equity for financing as the private equity market has exploded, experts said.
"The market is awash in private equity money. Private equity is very aggressive in looking for good companies and good growth opportunities," said Fentress Seagroves, a partner with PricewaterhouseCoopers' Private Company Services.
Private equity funds, which raised $200 billion worldwide from wealthy individuals and institutional investors last year alone, are hungry to invest in established businesses with strong fundamentals and growth potential - criteria that many family-owned firms meet, according to small business consultants.
For families, private equity funds can deliver the cash they need to grow their business. They can also provide liquidity for family-owned firms managing a generational change.
"Private equity is a terrific opportunity because it offers families internal and external expansion," said Eugene O'Malley, managing partner of Cobblestone Advisers, an investment banking firm that focuses on family-owned companies.
What's more, private equity firms are often flexible about financing terms with family firms. Depending on the family's objectives, they might purchase a majority or minority stake instead of buying the business outright, he said.
Overall numbers on the size and terms of private equity deals in mom-and-pop operations are hard to come by. Generally, investments tend to be on a smaller scale, ranging from a couple of million dollars to a few hundred million dollars. According to Dealogic, the number of private equity deals valued at $100 million or less rose to 571 last year, up 11 percent from 2005.
Private equity firms tend to target more established family firms with at least $50 million in annual revenue, experts said. These firms may be small, but together they make up a significant portion of the U.S. economy.
Family-owned businesses contribute anywhere from 30 to 60 percent of gross domestic product (depending on how a family firm is defined), according to a 2003 study published in Family Business Review. Gross domestic product is a broad measure of the nation's economic activity.
Besides ponying up money, private equity can offer professional advice that can play a valuable role in expanding these businesses. For instance, they can provide expertise in recapitalizing the firm or in developing strategic initiatives.
"We act as a catalyst to grow the company. We bring more of a structured growth plan that provides financial and internal controls and a certain professionalism that perhaps is missing," said Mark Hauser of FdG Associates, a private equity firm that invests in family businesses.
But private equity has its drawbacks. Private equity funds have to return capital to their investors so they aim to exit their investments within three to five years. They seek a return on their investment by either selling the company or selling their stake, so families need to consider that time frame when they team up with private equity, said Francois de Visscher, a consultant to family-owned firms who also runs a private equity fund.
"The family needs to realize that private equity is only transitional capital. They have to plan for the exit and keep that in mind," he said.
And not every family business is a perfect match for private equity. It all comes down to a family determining how it wants to approach its business over the next few years, experts said.
If a family isn't ready to give up some control or not ready to commit to working with outside partners, private equity may not be the best fit for them, small business consultants say.
"We interact with each of our family partners on a weekly basis. It's really like a marriage," said Hauser from FdG Associates.
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