Private equity: How to find your perfect partner

However, it is important to be fully aware what you are getting yourself into and you should make sure you understand how your agreement with a PE investor works. You are likely to be held to a business plan and a new decision-making structure with reporting obligations to the investor. 

The investor may also seek to include rights in an investment agreement to ultimately gain operational control of the business if it is not performing, so you should be aware of these issues during the negotiation process. 

For all these reasons and those set out below you will want to be sure you are making the right choice of private equity backer to welcome into the fold.   

Why private equity?

Committed and stable finance

PE funds seek stable growth of their investment portfolio companies because their success is reliant on building value in these companies during the term of the investment. 

A typical investment term by private equity would be three to seven years, which means that management have time to properly implement a strategic growth plan. A well-funded PE fund will also be able to look at injecting further finance after its initial investment, for example to fund acquisitions or refinance other debt.   

Reputation

PE funds go through a rigorous process of investigating businesses in which they may invest. They want to see evidence of the potential for growth during the investment term and are attracted to businesses with proficient management teams who have proven ability to generate that growth. Accordingly, bringing in a PE investor can be seen as a recognition of the strength of the business and ability of its shareholders and management.

A valuable resource

With PE investment should come strategic knowhow, commercial and financial expertise, management experience and a strong contact base, as well as the injection of capital. If the model works, businesses benefitting from PE investment are likely to grow more quickly, and based on more sophisticated and well-supported business planning, than other similar stage businesses.

Business partnership

Having taken a stake in the business, the PE fund’s interests will inevitably be aligned with other shareholders’ and management’s. The fund and its appointed board directors, therefore, will wish to make a genuine positive contribution to the development of the business.

If the business encounters difficulties then the PE fund will be incentivised to find solutions and any experience of similar difficulties with other portfolio companies could be of real value. Generally, the PE fund’s interests are synchronised with those of the other owners since it will ultimately realise its investment only on a successful exit. 

Which private equity?

Different PE funds have different strategies when it comes to the investments they make. The strategy of a given fund may dictate the size of its investments (both in terms of ownership share and financial size), the extent of its involvement in the day-to-day operational management of the business and its exit timetable. A business seeking PE investment should consider carefully what it is looking for from its investor and make sure that marries with the profile of the fund.   

In choosing a PE investor, a business should firstly identify and prioritise its objectives – which should not be limited to purely financial aims – and then select a PE fund that is on-board with those priorities. When it comes to documenting the investment, it is of course critical to clearly enshrine the principles of that deal.

In the same way that the PE fund will carefully investigate a business in which it may invest, a business seeking investment from a fund should obtain references and make sure it is the right fit.

For example, one way funds are increasingly able to differentiate themselves is by demonstrating sector expertise, which will increase the usefulness of the PE fund as a resource and as a business partner. In addition, if the news of the introduction is well-managed, the backing of a fund with known expertise in a particular industry can send a positive message to others, including partners, competitors and clients. 

Commercial terms aside, the decision as to which PE fund will best suit a business should be based ultimately on which fund is most likely to work effectively alongside management and allow the business to benefit from the various advantages (including those outlined above) of choosing the PE route.

The key to finding the ideal match is preparation – ask your advisers if they know funds that operate in your industry, research funds that are active in your sector and keep your ear to the ground at networking events. The more due diligence you can do in advance of seeking funding, the better your chance of finding the right fund for you.  

Oscar Horwich is an associate in the Corporate department at Stevens & Bolton LLP.

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