What is involved in working with a private equity firm, from the initial approach and alignment on investment thesis, through agreeing equity participation and governance (including Board representation and information rights), to collaborating on the value‑creation plan, reporting cadence, and eventual exit strategy for both you and the fund?
What Is Private Equity Funding?
Private equity (PE) is a type of funding offered by an organisation that takes an equity stake in the target business alongside an Operator/Operating Partner (OP), who can be a private buyer or senior-level executive.
Role of the Operating Partner in a PE-Backed Deal
The OP executive will have typically operated in the same sector as the target business and will also be comfortable having operated as a General Manager/Managing Director/Sales Director/Operations Director or similar, or alternatively, in a senior capacity in a specialist niche sector or technical role.
How Many Private Equity Firms Operate in the UK?
There are hundreds of private equity firms across the UK, and each will have its own specific requirements for a target business to be considered to join its portfolio. Equally, they will have portfolio companies where they are already invested and will wish to seek “bolt-on” acquisitions for some of these portfolio companies over time.
Where Do Private Equity Funds Come From?
The funds generated for investment by a PE firm tend to come from either a group of wealthy individual/high net worth investors who combine their investment capital to generate a specific fund, or from a corporate pension fund, or some other form of institutional funding. Money invested by a PE firm is often referred to as institutional money.
Governance and Board Involvement in PE Investments
The private equity firm will normally put one of its directors on the Board of the acquired company, and the Director will be heavily involved in key strategic decision-making, alongside the Operator, who will typically have day-to-day responsibility.
What Is It Like to Work With a Private Equity Firm Day to Day?
Once the investment has completed, the Operator will typically retain responsibility for the day-to-day running of the business, while the private equity firm will take a more strategic role.
The exact level of involvement will vary from one PE firm to another, but there will normally be an agreed reporting structure covering areas such as monthly management accounts, cash flow, sales performance, profitability and progress against the business plan.
The private equity investor may also expect regular Board meetings and will usually want to be consulted on significant decisions, such as major capital expenditure, acquisitions, senior appointments, additional borrowing or a material change in strategy.
For this reason, it is important that the Operator and the PE firm are aligned from the outset. Both parties should understand the growth plan, the level of investment required and the respective responsibilities of the management team and investor.
A good PE relationship should provide the management team with access not only to capital, but also to commercial experience, contacts and strategic support that can help accelerate the growth of the business.
What Size of Business Do Private Equity Firms Look For?
Private equity firms are only really interested in larger businesses, with EBITDA over £1m per annum. There are exceptions, but typically, private equity wants to invest in a business which already has a strong and diverse management team in place, with a proven track record of running the business in question.
Why Smaller Businesses Are Less Suited to Private Equity
Smaller businesses under £1m EBITDA don’t normally have this feature. There is normally an individual in the business operating below the Owner/Founder who is capable of running things day to day, but this person is often unable or unqualified to step up to run the whole business if the Owner were no longer in the business.
How Private Equity Ownership Differs From Other Funding
Private equity is a totally different form of funding from other types of funding in that the PE firm will require a sizeable stake in the business, and you will work in tandem with them to effect the future growth and development of the business. Some people say that working with private equity is working for private equity, but it depends on the individual and their personal attitude to risk and reward.
Pros and Cons of Partnering With Private Equity
With private equity, you have a partner to share the highs and lows, combined with the fact that the amount of capital you will need to invest and therefore put at risk is typically smaller than completing a debt-based deal, but be aware that you will own a much smaller proportion of the business under a PE-backed deal.
Typical Deal Size for a Private Equity Transaction
That said, the typical business size for a PE transaction will be for a minimum £1m EBITDA business and, by definition, a transaction value of at least £4m-£5m.
What Happens When a Private Equity Firm Wants to Exit?
A private equity investment will normally be made with an eventual exit in mind. Unlike an individual owner who may intend to retain a business indefinitely, a PE firm will generally be looking to grow the value of its investment before realising a return at some point in the future.
The likely exit strategy should therefore form part of the discussions between the Operator and the PE firm at an early stage.
An exit might involve selling the business to a larger trade buyer, selling to another private equity investor, completing a management buyout or, in the case of a significantly larger company, pursuing another form of transaction.
For the Operator, it is important to understand what an eventual exit could mean for their own shareholding. If the value of the business has increased substantially during the investment period, owning a smaller percentage of a significantly more valuable company can still produce an attractive return.
This is why alignment between the Operator and the private equity investor is important throughout the relationship. Both parties need to be working towards broadly the same objectives in terms of growth, value creation and the eventual realisation of their investment.
Is Private Equity Right for You?
The question for the buyer is whether it is better to have a smaller piece of a much bigger pie or 100% of a small pie. This will be a personal decision from one buyer to another – it is therefore a topic for further consideration.
