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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.