Published: May 16, 2023
The relationships which a business has with its bank and its other trusted advisers clearly need to be strong; however, there is an argument that senior debt has now become somewhat of a commodity product, whilst the option to change your professional adviser is generally readily available, if often inconvenient in the short to medium term. A PE relationship, on the other hand, is almost always long term and it is therefore vitally important that a business selects the correct partner.
The secret to ensuring you get the most out of the relationship with your PE backer is, as with most things in life, making sure that you do your research thoroughly. This is where your existing trusted advisers have a key role to play. Make sure you speak with your bank manager and accountants to understand who they have experience of working with and who they would, and wouldn’t, recommend for your business. Most PE firms will also have a wealth of information about their business on their website, including details around key investment team members and portfolio investee companies both past and present. Try to find out as much as possible about successful experiences which the PE firm has had, most specifically in sectors similar to your own. It can also be illuminating to find about any failures and to probe to understand reasons for them.
2. Making Contact
Having done your initial research alongside your advisers, the next step is to make contact with your selected PE firms. There is then really no substitute for spending as much time with the PE investment team as is possible and it is a necessary step to enable both sides to really get to know each other. Whilst many PE investors are sector agnostic, you will want to establish whether they have sufficient knowledge and understanding of your industry, as this will be crucial to their ability to add value and make genuinely positive introductions post investment. Find out more about similar companies which they have, or have had, in their portfolio and ask for the opportunity to speak openly with CEOs from businesses in which the PE firm has invested and successfully exited.
A PE investor will be looking for an open and honest engagement and should be interested in understanding every facet of your business. It is important that the information you share with them is accurate and all assumptions upon which forecasts etc have been prepared are fully documented and explained. The relationship should be viewed as a partnership, where both sides listen carefully, even if they do not necessarily always agree. The PE investment team will have valuable knowledge to share and you should be comfortable in asking them to assist with special projects and for other advice and input.
It is often underestimated, but it is vital that key individuals on both sides have a genuine liking for each other and that there is mutual respect.
4. Realistic Funding
Dilution will clearly be an important consideration; however, it is also very important that you are realistic about the amount of funding likely to be required to deliver your business strategy. Investors will not readily overfund your plan, but an underfunded plan is unlikely to be successful when you factor in inevitable unforeseen circumstances, and credibility when lost is extremely difficult to build back. It may also be the case that the knowledge and experience of one PE firm, and therefore the value they can add, is of sufficient perceived value to make a more dilutive or expensive offer of investment the better one for you to choose.
5. A Chairman
Once the transaction has been completed, it is likely that the PE firm will want to introduce an independent Chairman to sit on the board (often alongside an employed representative from the firm). This should be welcomed as an opportunity, rather than viewed as any sort of threat, and it is important to work alongside the PE firm to compile the optimum list of potential Chairman candidates. Sector knowledge is often cited as a prerequisite for the Chairman role; however, as important will be experience of scaling and exiting businesses, ensuring stakeholder alignment is maintained and managing the relationship between executive management and external investors. Again, take time to ensure you are confident in selecting an individual who you can work well with, learn from and get maximum value for your business.
6. Agreed Strategy
It is also important that management wholly take ownership of the strategy presented to the investor. The monies which the PE firm has provided should be used judiciously and in alignment with this agreed strategy and the investment plans. Any misuse of funds or diversion into ancillary activities, or ‘pet’, projects is likely to be viewed negatively.
During the investment it is important that you communicate early and often with your PE backer. Surprises are seldom welcomed and it is usually foolhardy to try and hide problems on the basis that you believe you will be able to solve them before your PE contact needs to be made aware. Very few investments suffer from only rare and minor hiccups. Resolving problems and challenging situations is part of everyday business life, and where a solid relationship with your investor has been forged during the pre-investment process, and the relationship develops and grows via an open and honest sharing of information, solutions will be far more readily forthcoming.