What is private equity and when might a business encounter it?
‘Private equity’ is the term given to investment partnerships whose aim is to invest in companies, grow that investment and then exit with substantial gains. The investors that provide the capital to the PE funds are typically institutional and accredited investors.
Businesses typically engage with PE either where PE acquires the business in its entirety or where PE backs management or another buyer. A business may also engage with PE where it is acquiring a substantial shareholding in the company for a significant investment.
Particular considerations when dealing with PE
Because PE’s capital comes from investors via a fund which needs to provide returns in the medium term (7-10 years), PE will view its investment in your business from that perspective. The average holding period in 2021 for PE fund investments was 5.2 years. In that timeframe the goal is for the investee company to achieve substantial growth and enhanced profitability so the PE fund’s exit is at a much-increased valuation.
As such businesses find the relationship with PE to be results driven, with substantial emphasis on information reporting and realising efficiencies. This is because this information is fed back to the fund managers to report to investors on the performance of the fund investments and by extension, the fund itself.
It is important to be aware that the PE usually funds all or a significant portion of its investment with debt which needs to be serviced by the business. The injection of substantial capital which PE can provide often enables a company to be more competitive, grow rapidly and achieve and even exceed its aims. Conversely, it can impose unsustainable debt on the business and prevent the business from remaining competitive by limiting the ability to invest in infrastructure, innovation and other business-critical functions. It is therefore vital to ensure that you engage with the PE house and develop a detailed business plan which you and your management team are comfortable is achievable and meets the needs of the business.
It is also worth noting that the PE market is increasingly specialised. This means that you have every opportunity to engage with a PE house which can bring particular sector specialisms, know-how and contacts. And with a collaborative relationship with your investor director and the team thar supports the investment, this can enable the business to achieve new heights.
How to get the most out of your relationship with your PE house
Being clear about the objectives of the PE fund itself, its time horizon for its investment in your business and relevant experience with other portfolio businesses will enable you to maximise the benefit of the relationship. Similarly, a willingness to engage in the details of the business plan from the outset and as it evolves throughout the life of the investment. Collaborate, challenge where necessary and maintain clarity on your respective objectives.
