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Private equity – so much more than just money

Private equity – so much more than just money 45

James MacLeay, senior investment manager at private equity firm WestBridge, looks at why business owners should consider partnering with a private equity house as a route to growth.

Private equity – so much more than just money 46There is a widely held view that business owners only involve a private equity firm when they are selling their business. Of course, there are many times when this is the case but this generalisation fails to capture the numerous advantages that partnering with a private equity firm can deliver.

Private equity, when deployed well, should be in the toolbox of any ambitious management team with an appetite to maximise the growth and development of their business.

Who comes with the money?

Introducing the right private equity partner should mean you gain much more than funding to transition ownership or support a business development initiative or acquisition strategy. You gain a group of new business partners with a raft of experience and expertise who are equally committed to optimising the growth and value of your business.  As with any partnership, the trick is to be selective in your choice. Consider the candidates carefully.  They all have money so ask yourself: 

  • Can I work with these people? To optimise the outcome for all, you are going to have to, and want to, work closely for the next three to five years.
  • Is there natural chemistry between us?
  • Do we share the same goals and objectives for the business?  
  • Do they add to the DNA of the business? 
  • Do they have relevant experience to support and potentially enhance the businesses growth plans?  
  • Does their involvement de-risk the execution of our business plan?

Taking private equity partners into the boardroom should not be seen as a daunting experience.  If done correctly you are gaining colleagues not adversaries or a corporate owner.  Making sure you all share the same goals and that you are aligned on the growth strategy is key.  Misalignment of strategy and objectives will certainly lead to conflict between the parties throughout the time you work together and undoubtedly a suboptimal outcome for all parties

Being an owner/manager or managing director can be lonely. Even with a great team around you, you are expected to keep a firm hand on the tiller and keep all the plates spinning. You will certainly need to periodically distance yourself from day-to-day affairs, to find time to think about broader issues like strategic growth and the long term vision for the business.  A carefully chosen private equity investor will help spread the load, provide a sounding board and provide insights and challenge to allow the business to go further, faster.  

Perhaps you’ve always wanted to become more competitive, grow through acquisition, enter new markets, introduce new products or invest in new facilities, IT systems or staff.  A private equity partner brings valuable experience of successfully achieving these goals and relationships with tried and tested consultants who can provide support ‘on the ground’ with specific value accretive projects.  What’s uncharted territory to you is undoubtedly familiar ground to them, which reduces the risk inherent in achieving your goals.

Business processes also need to evolve and develop as companies grow.  Keeping ahead of the changes required, whilst actively delivering growth, can be difficult to achieve.  Similarly, the general business environment is continuing to evolve with greater emphasis on environmental responsibility, social inclusion and strong governance (ESG).  High quality private equity partners are experts at ensuring ESG factors are ‘baked’ into a business’s plans and processes, ensuring that success is achieved in a responsible way.  

Top ten uses of private equity

Think of private equity, venture capital or institutional investment and you might typically think of funding for a shareholder transition via a management buyout or management buy in, a merger or financing an acquisition strategy. 

Whilst all of these are outcomes of providing finance, they do not really describe how experienced private equity supports the development of a business.  Private equity firms partner with management to provide much more than finance.  Here are some of the less well-known outcomes of partnering with private equity:

  1. Supporting the management team to develop their skills as their business grows
  2. De-risking the management of significant growth
  3. Mitigating the risk of acquisitions in existing and new geographies
  4. Mitigating the risk of diversifying into new products and geographical markets
  5. Evolving the management structure and operating processes in step with corporate scale
  6. Developing ‘best in class’ sales and marketing engines to optimise sales effectiveness and therefore growth 
  7. Supporting management teams to optimise business outcomes
  8. Implementing ESG initiatives and processes to improve the quality of business operations
  9. Identifying and implementing efficiency gains from adopting alternative business processes
  10. Using market information to inform and optimise decision making

All of these factors support businesses and their managers to achieve more than they originally envisaged at the time they sought a private equity partner.  A high quality private equity investor should significantly enhance the size of the pie.

Select your partner well

Entering into partnership with a private equity firm is a long term commitment.  Therefore, it is essential that time is spent researching and selecting the right private equity house to partner with.  The decision should not be made on financial terms alone.  Meet the individuals you’re considering working with and the wider team in their organisation.  Reference them by asking to contact other companies they’ve partnered with – don’t believe what they say but believe what they have achieved with others.  You should ask rigorous questions about their experience and expertise and most importantly get to know them to make sure the chemistry is right and that your goals are aligned

Like all business relationships, don’t underestimate the value of personal chemistry.  Inevitably, your company will face some unforeseen challenges.  Understanding how you will work together to overcome these is key.  Sharing a common goal and working with mutual respect is fundamental to any successful partnership. 

Other sources

Private equity, when deployed correctly, should be a value added alternative compared to other sources of finance.  Whereas banks and financiers will remain passive or an angel investor may not have the breadth of experience required, private equity partners have strength in depth and many years of experience to help your business grow.  This partnership with aligned objectives can be one of the most rewarding business journeys a management team undertakes.

Working solely with banks, despite their publicity, can be challenging if your company hits, as it undoubtedly will at some point, bumps in the road.  Their primary objective is to secure the return of their loan capital in the face of adversity and not for the business to come through the challenge in the best possible state.

Westbridge has supported many established, profitable and ambitious businesses.   The team collectively has over 100 years of experience supporting management teams to achieve and exceed their goals.  Here’s what the managing director of one of our portfolio companies recently said about us:

“We had many private equity houses courting us but we chose WestBridge for a number of reasons. They ‘got’ our business. Even before we selected them, we were impressed by the ideas they put forward. The extent of their contacts and experience meant that we felt they could add real value over the next few years.  Yes, their capital was a most welcome tool but having their support, advice, access to business development consultants, drive and experience ultimately proved far more valuable to us.”

Typically, WestBridge invests between £10m to £25m in established, profitable and fast-growing UK SMEs with enterprise values of up to £50m.  The firm has devised a value creation methodology that aims to optimise business growth and outcomes for all shareholders. The partners are always keen to hear from ambitious management teams seeking acquisition funding, development capital or support for a management buyout. To hear more about their investment criteria or discuss the suitability of a company, do get in touch.

 

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