There’s more to choosing an investor than financial results

Cultural relationships are the foundation of success, says Hall Morrice Corporate Finance's Tom Faichnie.

It’s taken years of hard slog: you’ve spent more time in the office than in your own home, burned the midnight oil going over balance sheets and sacrificed family time in favour of meeting with clients. The time has finally come for you to take the next step – you’re ready to reap the rewards of growing your business in a major way.

Whether you are about to introduce game-changing technology to the oil and gas sector or need capital to help you break into new international markets, you may be considering approaching a private equity house to turn those plans into a reality.

So how do you go about choosing the right partner for you? The answer should be simple – you go with the one that has historically delivered the highest returns. Not necessarily so, according to Tom Faichnie, managing director of Aberdeen-based Hall Morrice Corporate Finance.

“You should not make a decision on performance alone but be giving serious consideration to which investor is the overall right fit for your company,” says Faichnie, who has worked in the corporate finance sector for over 20 years.

“The cultural fit needs to be exactly right if the relationship is to be a success. From the outset, you should both have very clear ideas about your expectations or you could have a very long, difficult and frustrating road ahead of you.”

For example, do you want your investor to be hands on, but is their style hands off and to allow management teams to do what they want? Will your chief executive be involved at every step of the way, or will they find themselves out of a job? Does your vision of how the business will grow and develop align with their aspirations for return on investment?

Faichnie believes there is a lot more to consider beyond the end result. “Indeed it’s a position that you may never actually reach if the relationship falls down because of the wrong cultural fit.”

Faichnie specialises in working with corporate entities and private equity houses that are seeking to invest in oilfield services companies. The energy sector – where technology develops and companies grow at an astonishing rate – is littered with examples of investor relationships gone wrong.

Most of the private equity houses with current investments in the oilfield services sector understand the cyclical nature of the industry and in many instances have had to lengthen their investment period following the recent downturn.

But with the market improving, there are an increasing number of investors who see an opportunity to make a significant return through buying in “at the bottom” of the cycle.

“We have seen several instances in Aberdeen where falling revenues from an unexpected downturn in the industry has led to the shareholder value being eroded and in many cases removed,” he says. “Knowing how a prospective investor will react to this in practice is an important consideration for any management team that is seeking external investment, otherwise it may find itself under pressure from the same investors.

“There is no right or wrong way for investors to approach the oilfield services sector – all have different views, all have different things they are looking for and all offer different things to management teams.”

“Some are industry specialists, some focus primarily on supporting management teams, others on the product and opportunity. Some look to make a return throughout the period of investment, others look to re-invest everything to maximise their return on exit.”

Nevertheless, despite the different approaches, all have a very successful track record of growing business. What works best is really down to what fits best with the views and plans of the company and management teams, he says.

It is unlikely that businesses will find themselves needing investment overnight: growth is a long game and the need for finance could be years down the line. But Tom believes that it important to start planning for that eventuality sooner rather than later.

Selecting the private equity house that is right for you doesn’t have to be like a job interview or manager selection process, but it should be just as methodical. Think about what is important to you and your business culture, what personal and professional qualities your senior managers look for amongst their fellow team members.

There are hundreds of potential partners out there, but you should really narrow these down to three or four options not least because of the potential issues surrounding confidentiality if too many investors are approached, Faichnie says.

“If there is too much information out there it can become very damaging to the transactional process. You wouldn’t want to interview 100 candidates for a job, and selecting an investor should be no different.”

“Do your homework, learn about your prospective partners and their strengths and weaknesses and what their model is,” he explains. For example, would you be comfortable with getting passed to a new team once a deal has been agreed, or it is important that you work with the same trusted people throughout the entire process?

“Once you have a shortlist, you can then start the process of meeting them face to face and getting a feel for who is the right fit for you. Even if you think that you may be two or three years away from requiring private investment, you should start that process early,” Faichnie adds.

“Once every quarter arrange to meet up for a coffee or lunch and begin to understand how things will work in terms of a cultural fit. Over meetings and over time you will start to get an idea of whether or not you would want these people on your board.”

“You will be spending a lot of time together in the years to come, sitting around the boardroom table and trying to reach the same end goal. You need to be sure that the relationship will endure the test of time and while all the statistics and results may tell your head one thing, it is important too to listen to your gut.”

Tom Faichnie is the managing director of Aberdeen-based Hall Morrice Corporate Finance, a new division specialising in corporate finance and due diligence services in the energy sector. 

Praseeda Nair

Praseeda Nair

Praseeda was Editor for from 2016 to 2018.