In Britain, private equity has not been as closely associated with the funding of SMEs as it has in other countries. For instance, private equity and venture capital invested €26bn in US SMEs in 2013 versus only €5bn in Europe. In emerging markets this is also the case – countries such as Morocco and Egypt have increased funding to SMEs through private equity.
Private equity firms argue that they bring expertise and avoid the need for SMEs to pile up excessive debt. Specialists such as Growth Capital Partners declare the firm can get deals done quickly, and that it’s focussed on people.
One of the fears that many SME owners in the UK have about private equity is that it can only be used as a source of finance if the business owner is prepared to give up control, either by completely exiting their business, or by selling a majority stake.
However, private equity investors are increasingly keen to challenge that perception. “Minority investing provides an alternative way, in which, as the name suggests, a private equity investor buys a minority stake, often leaving the owner free to run the business,” commented Charlie Johnstone, partner at ECI Partners – which has worked with Café Rouge, Chubb, Racal Acoustics, Bloomsbury Publishing and Laterooms, among others.
So why might seeking a minority investment from a private equity partner be the right choice for a business owner? “Simply put, minority investments provide a more customised approach to finance that can be tailored to suit the nature, stage and management of the business,” said Johnstone. Importantly, it can allow business owners and entrepreneurs to retain a degree of control over their company and share in the future growth in value in their business even if they want to step away from day to day running of the business.
In some cases, added Johnstone, businesses want to give a private equity investor a share in the company for the purposes of risk management. “For many business owners their entire wealth is tied up in the business they have founded,” Johnstone explained. “ECI has enabled many founders to take some cash off the table by selling a minority stake, allowing them to continue to run the business and have additional capital and resources to help expand the business, for example through the acquisition of another company or by opening new offices or factories.
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Another motivation is the alignment of the ambitions of founders and the shareholders. “Businesses are often founded and financed by multiple people whose individual ambitions can change over time,” said Johnstone. “Management may want to re-align strategic thinking in the company and buy out their other co-founders/angel investors but continue to run the business.”
For some founders it’s time to take a step back from the day to day running of their business, crystallise some of their value but also share in the future value creation of the business they have founded, he said.
But others are looking for a lender with expertise in their particular sector. “Founders who previously looked to traditional lenders to fund rollouts, capex or acquisitions are now seeing their businesses and ambitions constrained,” said Johnstone. “An investment from private equity, with its approach to investing in and improving established businesses, is often an attractive alternative. Access to expertise and experience often proves as critical as access to capital.”
Harvard Engineering is a world leader in the design and development of control products for the lighting industry. ECI took a minority stake in November 2013 and is now working in partnership with the founder, John McDonnell, and the rest of the management team to drive forward the company’s strategic growth plans, including enhancing the company’s range of products and building a new state of the art R&D and manufacturing facility.
Private equity is about growth so it’s not surprising that the overriding driver for seeking external investment is the desire to accelerate growth initiatives, such as entering into new markets or pursuing acquisitive growth, whilst retaining control of the business. ECI took a minority stake in Liverpool-based energy services provider Clarke Energy in 2012 in order to help founder Jim Clarke to further accelerate the business’ international growth both organically and through acquisitions. “Since our investment, Clarke Energy has completed three strategic acquisitions in Bangladesh and South Africa,” said Johnstone.
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