Finding the right private equity partner for your business

Growing a company successfully and sustainably is serious business. But finding the right partner to support you on the journey can make it more efficient and fun, says Tim Smallbone.

Most business owners will admit that growing their company is the hardest job they’ll ever love. But while the early days are driven by enthusiasm and adrenaline, at some point the business will reach critical moments of development where it may be necessary to invest in people, systems or physical capacity. It may mean expanding the workspace, building out the sales and marketing team, or even expanding geographically or looking to buy another business.

Such inflection points may be able to be funded by the business’s existing cashflow, or you could consider bank debt. Both provide funding but little else, and for this reason, many businesses choose to take on an equity partner because of the additional expertise they can bring to help the plans succeed.

If the expertise is the selling point for this type of capital, then it’s crucial to get the right backer, and this can be tricky. Whereas with debt the terms and interest rates are likely to drive decisions, an equity partner is much more nuanced and so it is important to take care when selecting which backer you team up with.

‘It’s crucial to do your homework to ensure the chemistry is right’

Draw up a shortlist

Firstly, it is important you genuinely like each other. You’ll work very closely together over a number of years, and chemistry can help when the going gets tough. And it’s important to ensure that when the going does get tough, the backer doesn’t get going: while many will wax lyrical about the growth they achieved together with management teams, it’s unlikely that growth went in a straight line – so how were they to work with during the difficult times? A culture of support and experience in downturns is vital in uncertain backdrops such as the one we find ourselves in now.

These subjective points should be carefully assessed against a shortlist of firms suited to your plans. This is no mean feat; industry body InvestEurope has data on 1,400 funds in the UK and Europe, showing how vast the market is. To know where to start, reconcile your growth plans with the firms’ stated areas of expertise and approaches to growth. An experienced adviser can help with this exercise – and in fact they should have a firm ear to the ground when it comes to knowing the reputations of various backers.

How an equity partner can help

Each private equity partner will have a different skillset they can bring to the partnership to help accelerate growth. Aligning your own goals and ambitions with their track record is key to ensuring the investment will be a success.

Geographic expansion, whether regionally, in the UK or even internationally is an area where many private equity houses can help.

Equity partner case studies

At Inflexion we have built up a local presence in some of key markets, which helps our portfolio through warm introductions and local knowledge. In addition to our UK offices, we have been active in Bangalore, Shanghai and Sao Paolo for over a decade and Boston for a couple of years, with a new office in Amsterdam announced earlier this year. These help to make the global opportunities more within reach. For example:

Hertfordshire-based pet nutritional supplement business Lintbells hadn’t actually sold anything in the US at the time of Inflexion’s investment in 2017, but we have since supported its expansion into America, particularly with setting up local entities and navigating the legal and accountancy landscape. We have invested millions of pounds into entering the US, with early signs of success: a distribution deal was secured with one of the largest vet wholesalers there and the product range was tweaked. Favourable costs for TV advertising meant that this route was used for marketing, with a full team built out and the addition of further sales channels now in progress.

Halo, an optical transceivers business created by Inflexion in 2017 through the merger of two businesses in the UK and California, worked with our India office to affect a meeting which resulted in securing a major Tier 1 telecoms provider as a client the day before lockdown commenced in India. With 5G being rolled out in India this year and the telco building 100,000 new towers, Halo’s involvement business in India could grow significantly.

Specialist animal health information and data provider Kynetec carved itself out of Frankfurt-listed parent GfK in 2016 with our help in 2016, and subsequently utilised our local Brazil expert to help set up there.

Similarly, exhibitions business CloserStill Media expanded through geo-cloning its exhibitions in emerging markets, as well as making eight acquisitions during a successful partnership with Inflexion. CloserStill attributes much of the success of its Hong Kong presence – as well as the largest order in the history of its Asian business – to working with Inflexion’s in-country expert there.

Acquisitions an help transform a business but must be done correctly to be successful. This means identifying the right targets, respectfully approaching them and negotiating tactfully, and finally integrating the businesses effectively. An experienced backer ought to be able to assist with these aspects in addition to securing favourable terms with lenders if a debt package is necessary.

Following on from its successful carve-out, Kynetec went on to acquire five businesses during its partnership with Inflexion, ultimately boosting EBITDA by 200 per cent as it strengthened operations in North and South America, Asia and Europe to create a global business operating in 30 countries.

Another example is Huws Gray, which has become the largest independent builders’ merchant in the UK owing to its acquisitive growth. The Anglesey-based business had been growing organically and acquisitively for decades before taking on minority funding from Inflexion in 2018 to help it to grow faster but whilst retaining control of the business. Later that same year, Inflexion support Huws Gray in its acquisition of Ridgeons in the South and doubled its business overnight.

Digitising customer service

Digital enhancement is another key growth strategy. An effective digital strategy can increase customer engagement and loyalty as well as improve customer service, which in turn drives sales. Our specialist team assess each new investment’s digital capability and then work with the deal lead and management to enhance this during the partnership. Progress is reviewed regularly with the benefit of wider knowledge-sharing and learnings gleaned from each new investment. By way of example, we have supported Virgin Experience Days to upgrade its digital offering, which has led to a lower cost of customer acquisition, higher conversion rates and greater levels of repeat purchase. We are also working with them on robotic process automation, which can efficiently carry out repetitive tasks to cut costs as well as enable employees to shift their focus to more customer-facing, higher value-add roles.

Honing your go-to-market strategy

Commercial effectiveness is about considering your revenue engine holistically – charging more and selling more – and it is critical to sustainable growth. It starts with defining your value proposition through a deep customer understanding – what they need, value, and are willing to pay for. We have an in-house team that focuses on firms’ go-to-market strategy, and they’ve recently worked with roofing tile specialist Marley. Already at the top end of its pricing proposition, small changes are what will drive further revenue growth from its existing base. From rebates and surcharges, it can be about changing 100 things by 1 per cent, rather than one thing by 100 per cent. And this is a process of continuous improvement rather than a one-and-done.

Building up your management

Talent management underpins everything else, because people are at the heart of every business. We have a team which reviews management teams against the firm’s growth plans to suggest additions which can enhance the leadership, and this isn’t restricted to the UK. Halo for example found itself without any local support in an important sourcing centre – China – after its supply chain manager left in 2020. It proved very helpful to have a local, on-the-ground resource when no foreigners were allowed to enter the country because of the lockdown. This presence enabled the appointment of a highly experienced professional and saved the hefty fees typically associated with recruitment.

Turbocharge your growth

Partnering with the right private equity firm can really turbocharge your growth – and hopefully be fun in the process – but it’s crucial to do your homework to ensure the chemistry is right. It’s not just about the years you work together, but also about ensuring your growth is sustainable and that you’re prepared for the next leg of your journey, be that a new strategic corporate partner, another financial backer or an IPO.

We have enjoyed working with more than 90 companies over the last 22 years, with many of the individuals involved returning to work with us in another capacity, so I like to think we’re doing something right. The journey will be hard work, but it should be rewarding and enjoyable too.

Tim Smallbone is a partner at Inflexion Private Equity

Related: Private equity – driving real value in investor relationships

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Tim Smallbone

Tim Smallbone is a partner at Inflexion Private Equity.