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 Hames Director 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
Key requirement
You are looking to continue your current growth performance
Key benefit
Key consideration
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.”
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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 business Private Equity often demands a controlling stake
- Controlling interests Investors will expect board seats and even choice of Chairperson
- A medium-term solution Private 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 change You 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.”
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Tim Hames Director General @ BVCA |
What's your next step?
Who's involved in Private Equity?
You (the Seller)
- 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.
