2 May 2019

EXPLORING PRIVATE EQUITY: Is it right for you?

Businesses often face their biggest challenge when it comes to securing funding to realise business goals or growth potential. Whilst some prefer to use retained profit, others look externally for help, where options include private shareholders, bank loans and private equity funding.  Whatever the reason for an ambitious business owner seeking funding, it is important to choose the right option to suit their particular business needs.

Private equity backing is currently on the increase. European private equity recorded its strongest-ever quarter in Q1 2019, from £6.1bn in the fourth quarter of 2018 to £8.9bn between January and March this year, a £3.9bn increase from the £5bn total value in the first quarter of last year (source Unquote), and according to the European Business Awards Hurdles to Growth research 16% of companies in Europe fund their business with private equity or venture capital backing to help their business grow.

In a guest blog we ask Inflexion, this year’s sponsor of the European Entrepreneur of the Year Award, why private equity could be the right choice for a company, and what a private equity company looks for when approached for potential investment.

Why would an entrepreneur looking for funding for his business choose private equity?

The key difference between private equity and other routes is that, beyond financial funding, private equity firms provide a whole range of expertise that can help a company bolster its expansion and reach its future goals. So this is a great option for an entrepreneur looking for more of a partnership with its lender.

Crucially, rather than provide a loan which imposes restrictions on capital flows, private equity firms align their interests with management through majority or minority equity stakes. This can prove vital when undertaking transformative changes.

Is there flexibility with the funding?

Yes, private equity is increasingly flexible. Nowadays funders offer a wide range of solutions, from majority buyouts to minority investments (or partnership capital) for entrepreneurs who wish to de-risk or gain a partner to help them grow.

What if a company wants to expand to new geographic markets?

Private equity can help you expand into new countries, whether it’s simply expanding your footprint or growing through acquisition, which can help transform a business if done effectively.  The right backer will help you come up with strategies to expand internationally and if you go down the acquisition route, they can target the right businesses.

Will a private equity firm help with digital transformation?

As entrepreneurial businesses know, an effective digital strategy can help improve customer service and operations, ultimately driving sales and revenue.

An often overlooked benefit of some private equity partners is the in-house digital team that will assess each company’s digital capability and work to enhance it during the partnership. A good PE company will then assess progress regularly with the benefit of wider knowledge-sharing and learnings gleaned from each new investment.

What about acquisitions?

When it comes to M&A, private equity firms can help throughout the whole process, ensuring that the right targets are identified, respectfully approached and then tactfully negotiated with.  The right backer ought to be able to assist with these aspects – as well as the integration post-deal – in addition to securing favourable terms with lenders if a debt package is necessary.  Whilst also helping a company with what it needs short-term, the best partnerships will also prepare a company for the next stage of its journey, whether that is a new strategic corporate partner, another financial backer or an IPO.

What will a private company look for when assessing a business for funding?

All good private equity firms will look at each company on its merits, as businesses will have different drivers in their respective markets. But one important matter is whether there are any obvious vulnerabilities, namely issues out of their control such as forthcoming legislation changes. These are a no-go for many investors as it’s a variable that cannot be controlled.

What does the business itself need to show?

The business must provide something worthwhile for customers, as this leads to decent margins and that is crucial. A diversified customer base is equally as important, as overreliance can be risky.

Also, if a private equity firm sees a rhythm of profitable growth backed by a solid management team, it will take a closer look. Typically, it will want strong net margins of 15-20% and robust growth.

There must also be an element of continuity, whether it’s the founder or someone else who knows the business intimately and is able to stay on board post-deal to help manage change.

Finally, a good alignment with the investor will be a plus.

 

 

Inflexion is a mid-market private equity firm investing in high growth, entrepreneurial businesses with ambitious management teams and working in partnership with them to accelerate growth. Inflexion’s approach allows it to back both majority and minority investments, typically investing £10 million to £250 million of equity in each deal.

For further information please contact: Andrew Priest (andrew.priest@inflexion.com)


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