Private equity – driving real value in investor relationships

Here, Ryan Hawley, partner and private equity specialist at law firm Mills & Reeve, finds out how to discover the perfect investor.

The UK economy remains robust despite uncertainty surrounding Brexit and for many ambitious organisations, growth opportunities continue to present themselves. For owners and managers of businesses looking to the next stage on their evolution, obtaining a capital injection and the backing of a supportive investor can be transformative. The private equity industry is evolving, with many houses now looking to work with businesses over a longer term for greater success and returns. But in a growing and increasingly diverse investor marketplace, how do you find the perfect backer for your business?

From FMCG to manufacturing and property to leisure, businesses across the spectrum have benefitted from private equity. Leon, the Dutch healthy fast food chain, is a great example of how PE has enabled a UK and European success story to put its best foot forward in the highly competitive US market, following £25 million of backing from Spice Private Equity.

However, while working with a private or VC-backed organisation can put the accelerator on a business’ growth, there is much to prepare and consider before signing on the dotted line – and this starts within. Managers must first evaluate their own motivations and the strengths of the business before assessing the intentions and expectations of the investor.

Introspection before action

The process and preparation behind becoming investment ready can be complicated. Do all of the management team have an appetite for moving to the next stage, or might the desire for further investment offer the opportunity for certain managers or shareholders to exit the business? It can be tempting for both to get caught up in the number crunching – demonstrating their strong track record and sales pipeline – before even truly understanding their own and the business’ motivations, as well as those of possible investors.

An in-depth review of how a company has made it this far; why it needs investment; the strengths and weakness of the management team; how much equity the current owners are willing to give away, as well as an honest assessment of potential exit plans and short and long term business targets, will ultimately inform the criteria for the funding relationship.

Should the growth plan highlight a potential gap in the management team’s experience, or opportunities for growth that require specific understanding – such as international expansion – then seeking the value that private equity can add above the purely financial should be considered. Specialist private equity firms, home to sector experts, can bring valuable industry advice and guidance.

Well known Scottish brewer Brewdog, which this year secured a £213 million equity investment in return for a 23 per cent share from US-based FMCG investor TSG Consumer Partners is a prime example, with TSG leveraging its US knowledge to Brewdog’s advantage. This partnership will see TSG deploy its understanding of the sector and the US trading environment, giving the brand more international fire power.

Private equity investment can also offer a route for owners to exit a business, and for the next generation of management to become shareholders. Palatine Private Equity’s recent £65 million investment in Westleigh Partnerships Ltd, a provider of affordable residential property, provided such an opportunity. The backing saw the founders sell a significant stake, and the existing management team to become owners of the company, something that has been crucial to its ongoing success.

At the opposite end of the scale, business angels – individual investors rather than institutions, who typically provide funding for early stage business – can provide an element of support alongside funding. These tend to be less hands on, but can provide business insight, commonly suited to smaller businesses that need the finance and some degree of counsel.

Look beyond the surface

Finding the right funding partner can take time. Yet, all too often, it is the money that does the talking and hasty decisions can be made in favour of the investor offering the biggest pay cheque. Typical lifespans of private equity deals are three to five years, so deals signed without an appropriate level of care and diligence on potential backers may result in an unsuitable, difficult relationships that yield less than ideal results. While investment can unlock an exciting new chapter for any business, owners and managers must fully assess their options.

The priority should be to examine the history and lifecycles of potential investors’ previous deals. This will demonstrate their sectors of focus, the characteristics of the management teams they tend to favour and levels of involvement in investee businesses. The best private equity firms will bring a fresh and impartial perspective, helping to drive growth by spotting opportunities and helping to solve issues that may be holding back growth. Also, if the strategic goals of a business involve unchartered markets, investors with knowledge of these areas may be able to open doors that would otherwise be closed.

Three to five years is a long time, and will involve both good and bad spells and difficult conversations – this is why chemistry and the ability to build a productive relationship is key. Time invested in getting to know people both in and out of the boardroom before selecting an investor is invaluable, and works both ways. Business owners and managers should embrace the opportunity to build a rapport and create a two-way dialogue to assess the suitability of the backer to the business and its team.

Private equity can galvanise a growing business and propel it to new heights. As the range of options open to businesses becomes ever-more diverse, it’s vital for decision makers to spend time and effort on finding the best match. A thorough understanding of their own objectives, paired with an in-depth look at their options and the people behind the institutions, should help them to forge a lasting partnership with the right investor that delivers bottom line benefits for both investor and investee.

Ryan Hawley is a partner and private equity specialist at law firm Mills & Reeve

Owen Gough

Owen Gough

Owen Gough is a reporter for SmallBusiness.co.uk. He has a background in small business marketing strategies and is responsible for writing content on subjects ranging from small business finance to technology...

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