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A Private Equity firm invests in businesses in return for a large or controlling stake, to help them grow to the next level.
“Unlike Venture Capital which is like a long, slow run on the runway. Private Equity is like taking something that’s already mid-air and moving it faster.”
Tim HamesDirector General @ BVCA
Killer Stat
85% of Private Equity and Venture Capital funding in the UK goes to SMEs, usually those with a turnover of at least £10 million
You are looking to continue your current growth performance
Key benefit
You will gain a professional investor who will help devise a growth strategy
Key consideration
You will need a strong, long-standing relationship with your investor, as you will need to work together to help grow the company
What is Private Equity?
Whilst giving up control of your business may sound scary; Private Equity could be a good option for founders who:
Need funding and expertise to take their business to the next growth stage
Feel they have taken the business as far as they can
Want to retire
Intermediaries, like lawyers, investment banks or advisers often approach businesses. Sometimes, Private Equity firms make the approach directly. Businesses can also approach firms in return.
A Private Equity firm will take a large or controlling stake in a business. In return, the previous shareholders of the business may receive consideration (normally cash settlement), in addition to the business receiving cash and an expert steer to help them grow.
What are the benefits of Private Equity?
Large investments
Relevant businesses can access tens of millions of pounds to grow.
Professional help
Investors use their expertise to support the company’s growth strategy and are motivated to do this through an increase in the value of their shareholding.
Exit strategy
Private Equity funds aim to implement a strategy from day one to make a business more attractive to buyers. Typically this can be over a five year timeline.
Process
Private Equity can be a personal process, where business owners deal with a team of two to five investors.
What are the risks of Private Equity?
Equity and growth
You are giving away a significant share in your business in return for finance. There is no guarantee that your business will grow and succeed as a result.
Length of investment
Private Equity investors typically look to sell their shares within five years.
“You build relationships in Private Equity over three or four years. So, if you’re thinking of retiring and there’s no obvious succession plan, Private Equity makes your exit easier.”
Tim Hames, Director General Director General @ BVCA
Is Private Equity right for you?
About your business
Business stage
Mature and growing; profitable
Annual turnover
£10m-£100m
Sectors
All sectors
Regions
All
About Private Equity
Purpose of finance
Change in shareholder ownership, management buy-outs, acquisition, product development, entry into new markets
Amount of finance
£10m-£50m
Duration of finance
3-5 years
Cost of finance
Monitoring and director fees; loan note interest
Time to finance
Minimum of 3 months but can take up to a year
Ask an expert - what do you look for in a business?
Tim Hames, Director General @ BVCA
Private Equity firms look for a place they can make a return. If I had to offer businesses three tips, they would be:
It’s more of a sin to ask for too little money than it is to ask for too muchIf you end up going back and asking for more, it looks unprofessional. Pitch high in the first place and the firm can always scale you back
You should look for a partner that brings you more than moneyLook for sector knowledge or expertise that you don’t already have on your board. Sector knowledge will bring contacts and networks, whilst board experts will be able to pre-empt issues with personnel and expansion
Save time by understanding the difference between institutions before you speak to themUnderstand how your business matches up to the person you’re speaking to. Make sure you understand what they’re looking for.
Private Equity considerations
Giving up a stake in the businessPrivate Equity often demands a controlling stake
Controlling interestsInvestors will expect board seats and even choice of Chairperson
A medium-term solutionPrivate Equity is not a long-term source of funding. Firms will often sell their shares after the investment period (usually within five years) is over
Wide-ranging changeYou must be willing to make strategic, operational and management changes in the business
How do you get Private Equity?
Investors will often approach you, but it's fine to speak to them too.
Seek independent finance advice from your accountant, financial adviser or speak with other intermediaries
The process can take up to a year
“The best performing asset class of recent times is Private Equity. A lot of money is trying to get in, so it’s in your interests as a business to think of how to satisfy that demand.”
The current shareholders of the company who want to sell.
Private Equity Investors (the Buyers)
Who keep an eye on the market and approach suitable businesses aligned to their investment strategy.
Buy-side Advisers
Intermediaries, like investment banks, corporate finance and boutique advisers. They help the Private Equity Investors complete due diligence on the company, shareholders and other key areas specified by the incoming investor.
Sell-side Advisers
Intermediaries, who help the sellers of the company present it in a professional and sellable manner.
Lawyers
Both the seller and the buyer (Private Equity Investors) will hire their own lawyers to ensure the legal documents include all the correct details.
Debt Providers
Private Equity often triggers a change of ownership. Debt providers will help the Private Equity firm to buy their stake in the business and any existing debt. This is called a leveraged buy-out.
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An IPO (or Initial Public Offering) is when a business sells shares via the public markets, such as the Main Market or AIM operated by the London Stock Exchange.
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