8 steps to getting the right PE investor

If a business is seeking funding – perhaps, for example, it’s appropriate for new or existing management to acquire the business, or perhaps some existing shareholder(s) want to exit – private equity funding should be considered.

The value of European private equity deals in 2015 was the highest it has been since 2007, according to data published by the Centre for Management Buyout Research, and the UK market remains a leader in Europe. There is significant competition amongst PE funds for good quality assets in which to invest, which drives up multiples for those businesses, but any business considering investment from one or a number of competing PE funds should approach the decision very carefully and consider a number of factors before taking the plunge.

Prioritise objectives and analyse benefits
In choosing a PE investor, it is important to first identify and prioritise the business’ objectives – which should not be limited to purely financial aims. Then it will be possible to select a PE fund that is aligned with those priorities.

Some of the key considerations when selecting a PE backer will be those set out below.

Committed finance: One advantage of PE in general, over some other types of funding, is that a PE fund seeks stable growth of companies it invests in because the fund’s performance depends on building value during the term of the investment, which is typically 3 to 7 years. This should allow the management team time to implement a strategic business plan. A PE fund may also be able to look at injecting further finance, for example to fund acquisitions or refinance other debt.

Expertise: Apart from the welcome injection of capital, the right PE investment will also bring strategic knowhow, commercial and financial expertise, management experience and a strong contact base. These are sophisticated investors whose job it is to support and grow their portfolio companies.

Support for growth: The underlying business model of PE funds drives their decision-making, to an extent, as to which businesses they target and the structuring of the investments in those businesses. Commonly, that model will drive them to support a sustainable and scalable growth strategy which, if implemented successfully, will be a win-win for both management and investor.

Aligned interests: Generally, having taken a stake in the business, the PE fund’s interests will be aligned with other shareholders’ and management’s. If the business encounters difficulties, for example, then the PE fund will be incentivised to find solutions and any experience of similar difficulties with other portfolio companies could be extremely valuable.

Market validation: PE funds go through a rigorous process of investigating businesses in which they may invest and are attracted to businesses with proficient management teams who have proven ability to generate growth. So successfully bringing in a PE investor can be seen as recognition of the strength of the business and its management.

The PE investor who appears to be able to best provide the benefits listed above may be the ideal partner for the business.

Sector experience
One way funds are increasingly able to differentiate themselves is by demonstrating sector expertise, which can hugely increase the usefulness of the PE fund as a resource and a business partner. An investor with a track record of investing in analogous businesses may better understand your business and from its prior experiences may have solutions to problems you encounter. Such an investor is also more likely to have directly applicable management experience and may have a very strong base of relevant contacts from which the business can benefit. Further, if the news of the introduction is well-managed, the backing of a fund with known expertise in a particular industry can send a very positive message to partners, clients and competitors in the sector.

Investigate your investor and define your deal
In the same way that a PE fund will carefully investigate a business in which it may invest, a business seeking investment from a fund should obtain references and make sure it is the right fit. Different PE funds have different strategies when it comes to the investments they make. The strategy of a given fund may dictate the size of its investments (both in terms of the amount of money invested and the percentage equity stake it will seek), the extent of its involvement in the day-to-day operational management of the business, and its exit timetable. A business and it’s management team seeking PE investment should consider carefully whether what they want matches the investment profile of the fund.

Commercial terms aside, the decision as to which PE fund will best suit a business should be based ultimately on which fund is most likely to work effectively alongside management and allow the business to benefit from the various advantages (including those outlined above) of choosing the PE route. The key to finding the ideal match is preparation – ask your advisers if they know funds that operate in your industry, research funds that are active in your sector and keep your ear to the ground at networking events. The more due diligence you can do in advance of seeking funding, the better your chance of finding the right fund for you.

As an overriding message, it is important to be fully aware of what you are getting yourself into and you should make sure you understand how your agreement with a PE investor works. You are likely to be held to a business plan and a new decision-making structure with reporting obligations to the investor. The investor may also seek to include rights in an investment agreement to ultimately gain control of the business if it is not performing.  You should be aware of these issues before going down the PE route. During and following negotiation of the terms of the investment, it is of course critical to enshrine clearly the principles of your deal in the documentation.

By Oscar Horwich, Senior Associate in the Corporate team
First published in Business Matters, June 2016

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