Private equity investors are not all the same – different funders have very different styles and reputations. It is essential to understand the character of the potential funder – are they aggressive and interventionist or are they supportive and generally hands-off? Will the funder deliver on the price or terms offered, or are they likely to seek to alter terms as they progress through due diligence? The only way to really understand this is for the business to do detailed research.
Businesses must ask for references from the potential funder including a broad selection of its existing portfolio companies. This will help to find out what they are really like to deal with at every stage of the life of an investment, from the initial transaction, over the investment period and finally when the time comes to exit. Ask for references from a selection of portfolio companies – those that have gone well and particularly from those that have not gone well.
Many businesses will not perform as strongly as management and investors hope, and a constructive, supportive approach from the private equity partner can be invaluable when times are tough. Pick some portfolio companies from the funder’s website at random – don’t simply take the references provided by the investor. Take the time to speak to the CEOs and FDs of these companies.
It also helps to engage a proper, experienced corporate finance adviser. These advisers know the private equity market well – they know what sorts of companies and sectors different investors like and are active in and can target the opportunity to the right funders, saving wasted effort. The investment process can be very demanding of management time, and the real job of running the business needs to carry on – advisers can help you remain in control of your time.
Understand the sources of funds that each private equity investor has and the impact that may have on their behaviour. Do they have liquidity in their funds to support you if you need further capital? Are they reaching the end of the fund’s life, which may put them under pressure to exit investments? How is the rest of the portfolio performing? How important is your business to their overall performance?
Aside from terms offered, the personal chemistry with a potential funder is crucial. You are entering a long term partnership that has to be positive, productive and enjoyable. Take every opportunity to meet as many people from the private equity firm as possible. In that way you will get a good understanding of their corporate culture and the fit with your organisation. Don’t necessarily go with the best financial terms; go with the best corporate fit.
Mike Walker is a partner at Mobeus
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