Against the current economic backdrop, and with a potential recession looming, business owners with significant wealth tied up in their companies are looking to de-risk their positions.
Some are weighing up ways to crystallise part of the value they have created by selling a portion of their shareholding to a private equity sponsor. These kinds of private capital-backed ‘cash-out’ deals are becoming more common these days.
Seeking private capital to fund a management buyout or to deliver growth is nothing new, but the trend to use it to release some of the capital built up in a business back to shareholders is a relatively recent phenomenon, and one which has increased since the Covid pandemic.
Business owners have become more conscious that having so much invested in just one asset presents a risk no matter how well their business is trading. They are starting to realise that unlocking some of the cash would enable them to reap the rewards of their labours, while retaining control of the company and giving them scope to diversify their asset base.
These deals can also enable shareholders who are no longer as active in the business as they once were to exit, as a transitional measure, without triggering a full-scale sales process.
Another motivating factor is the prospect of tax rises. In tough economic times, governments are bound to look at how to fund public spending increases, and whenever that happens, capital gains tax ((CGT) and Business Asset Disposal Relief) – will doubtless be in their sights.
Even though a CGT hike was put on ice last year, it would hardly come as a surprise if those plans were re-heated. Especially if the Treasury needs to boost its coffers to meet its pledges on providing support with soaring energy bills.
Targeting a tax relief that encourages wealth creation would be a relatively easy win right now – even if that wealth is created via much-needed entrepreneurialism and investment in SME growth, which ultimately benefits the whole of UK plc.
How does private equity help business owners with cash out transactions?
As it is permanent capital, private equity makes sense as a route to financing these sorts of transactions – more so than using debt in the current circumstances. Private equity also provides more than just money: it’s about providing practical support in the form of advice and guidance to help grow a business for the benefit of all stakeholders.
The fact that sponsors also take a long-term view can help with strategic planning. Often, these deals are hybrid in nature: where an impetus to de-risk (and take cash out) is coupled with ambition for expansion (and therefore an element of growth capital is simultaneously injected). This would, for example, enable the investment to be used to acquire a competitor at an opportune moment.
Entrepreneurs and successful business owners have got where they are today by being bold and pragmatic and being prepared to think outside the box. This trend towards considering ‘cash out’ opportunities is a reflection of all these traits, and it’s a move that can deliver advantages to the business itself, as well as to the individuals concerned. No wonder it’s catching on.