Zac Barnett is a Chicago-area fund finance professional and co-founder of Fund Finance Partners, LLC, a fund finance advisory firm serving private fund sponsors across the United States. An Attorney with more than two decades of experience in fund finance, private equity, and commercial lending, he has advised clients on financing structures, lender selection, and fund-level debt strategies. Before establishing Fund Finance Partners, he spent 17 years at Mayer Brown, LLP, where he worked on numerous large and complex financing transactions involving lenders and borrowers. His experience representing major investment banks and fund sponsors, combined with his ongoing participation in industry organizations and events, provides relevant context for discussions involving private equity investment approaches, fund formation considerations, and financing solutions used throughout the investment lifecycle.
A Look at Private Equity Investment Strategies
Private equity (PE) is an investment made by specialized firms in companies that are not publicly traded. PE firms pool capital from institutional and high-net-worth investors to empower promising but financially challenged businesses to help them grow and expand. PE investments involve long holding periods, active ownership of the target company’s operations, and strategic transformation to ensure investors realize their targeted returns and the business achieves its financial objectives. PE firms often exit these deals after 10-12 years, leaving when the target company achieves a favorable valuation.
PE firms implement several investment strategies depending on the performance and state of a target company. A leveraged buyout (LBO), for instance, involves acquiring a controlling stake in an established company using a combination of equity and substantial debt financing. LBOs focus on utilizing the target company’s cash flow to service and repay the debt over time. This strategy helps investors optimize returns on equity, provided the business remains stable and generates steady income.
After acquisition, PE firms typically introduce operational improvements, cost reduction approaches, and strategic repositioning to enhance profitability. The success of LBOs relies on disciplined financial structuring and the ability to exit the deal when the target company’s valuation is high, often through a sale or public offering. However, relying on leverage can be risky, particularly in areas with high interest rates or declining revenues, where debt obligations may become burdensome.
Venture capital is another popular PE investment strategy. This approach focuses on early-stage companies with high growth potential but also high uncertainty. Startups developing innovative products in emerging markets may fail to secure financing from traditional lenders, including banks, and PE firms offer a valuable alternative.
Since many startups fail, venture capital firms implement a portfolio approach, where highly successful investments generate returns that outweigh losses from those that are unsuccessful. This investment strategy requires patience, as it may take several years before a business reaches maturity. Beyond providing capital, venture capital investors mentor the target company’s founders, influencing the business model and facilitating access to valuable networks. While the risks are considerable, the potential rewards can be substantial, especially when backing companies that achieve rapid scalability.
PE firms can also deploy growth equity to established companies that need to scale operations, enter new markets, or fund strategic initiatives. These investments are usually structured as minority stakes, meaning the PE firm does not fully control the business. Instead, PE firms partner with existing management teams to drive growth without altering the business’s structure. Since returns are driven by revenue expansion and market penetration rather than financial restructuring, this strategy is suitable in sectors experiencing rapid growth, such as technology and health care.
In addition, distressed investing is another popular PE investment strategy, which involves acquiring companies that are performing poorly, financially troubled, or facing bankruptcy. These investments are typically secured at discounted valuations due to the target company’s challenges, and PE firms focus on restructuring operations, improving financial stability, and restoring profitability before exiting.
Importantly, distressed investing requires specialized expertise in turnaround management, legal processes, and debt restructuring. This strategy is particularly effective during economic downturns, when many companies face financial difficulties and opportunities for discounted acquisitions increase. Although the potential returns can be high, the risks are equally significant since not all distressed businesses can be saved.
Lastly, PE firms can implement mezzanine financing, which is a hybrid strategy that combines elements of debt and equity. Here, PE investors provide target companies with subordinated loans that rank below senior debt but may include equity-linked features, such as warrants. This allows investors to earn fixed interest income while also enjoying returns on equity if the business performs well. Mezzanine financing is often used to bridge funding gaps in buyouts or expansion projects, offering companies flexibility and convenience in case securing traditional financing is challenging.
About Zac Barnett
Zac Barnett is the co-founder of Fund Finance Partners, LLC and a fund finance professional with more than two decades of experience in private equity, fund finance, and commercial lending. A graduate of Northwestern University School of Law and Elmhurst College, he previously spent 17 years at Mayer Brown, LLP. His work has involved advising fund sponsors and financial institutions on financing transactions, lender evaluation, and fund-level debt strategies.
