Most investment firms are exit-focused: they strive to realize a high IRR and multiple dollar return on investment in as short a time period as possible. These firms are driven to put investment funds to work as quickly as possible, to invest in a broad, diversified group of portfolio companies, and then to raise new capital for investment. This “deal factory” mentality often creates an investment environment that is detrimental to an individual portfolio company’s long-term growth.
o
 

1) To enhance investment returns, a portfolio company’s capital structure is engineered to minimize initial equity outlays. Substantial debt levels place a heavy cash flow burden on the company and leave little cash for re-investment in growth.

 

 

2) Strategic (if any) and tactical decision-making is oriented towards inflating near-term revenues and cutting expenses to enhance earnings and position the company for a favorable exit.

3) Short-sighted direction and decision-making often create deceptive growth that mask eroding long term business fundamentals. Without a strategy for sustainable growth, a company’s prospects and viability can suffer irreparably.