Published: Jul 18, 2023
Focus:
Insights
Debt financing, commonly in the form of a loan, involves borrowing money and paying it back with interest. It may be attractive to business owners, as no equity and control rights are conceded, but the capital must be repaid in full and with interest within a fixed amount of time. This places additional financial burden on the company, especially in today’s higher interest rate environment, and will mean that less money is available to invest in growing the business.
Introducing Private Equity investment, on the other hand, allows owners to monetise part of their share of the business while maintaining ongoing ownership, they can realise an element of the value of the company today, whilst still enjoying the benefits of its future growth and success. In addition, PE firms have a wealth of knowledge across a range of sectors and can add value to a company by sharing best practice, offering operational and strategic advice, and providing access to industry-leading talent, extended networks and experience in the form of non-executive directors.
When releasing equity in a business, some owners may have concerns that they will be handing over control once they secure investment. This isn’t the case, for example, Maven invests in management teams and backs their knowledge and expertise to run the business going forward.
How does a Private Equity deal work?
Investors will each have an investment strategy and style specific to their organisation, ranging from providing pre-revenue seed capital to investors operating on the global stage with multi-billion pound funds. Deals can take a variety of forms, each with differing structures and targets appropriate to the investee company, and a benchmark is typically set for returns on investment for investors.
It is important that the vendors consider whether their strategic vision will be shared by incoming investors, and selecting the right PE firm with an aligned end goal should be central to the decision making process. At Maven we have a strong belief in fostering good working relationships with business owners, the management team, and their vision, particularly given the joint nature of the medium to long term journey between all parties.
What are the key questions vendors should be asking themselves when considering Private Equity?
Before undertaking conversations with PE houses, it is important for business owners to ask themselves the following questions:
• Does the business have a robust and ambitious growth plan?
• Does the business have an aligned, committed management team which has the drive and capability to deliver the business plan?
• Does the business have a strong product/service with a demonstrable track record of success?
If the answer to the above questions is yes, then PE is a viable source of funding and should certainly be considered.
It’s therefore important for management teams to undertake sufficient research, examining the needs of the business but also the individuals involved, to allow for an informed decision to be made. Management teams need to make sure there is strong chemistry and cultural alignment with the people who will be joining the board and working alongside the team for the next few years.
What additional value would Private Equity bring to me and my business?
A clear benefit of a PE investment is the de-risking potential available through partial cash out, alongside further investment in the business going forward. However, this should not be the only reason PE is sought, as investors can also bring process improvement, operational enhancement and margin improvement capability through extensive experience and by leveraging an established network of individuals and businesses. In addition, they can facilitate merger and acquisition activity, committing capital for the purpose of acquiring complementary businesses to accelerate growth.
In all, Private Equity can be seen as a flexible solution for owners to realise an exit scenario, whilst also allowing the realisation of growth objectives, both organic and/or through acquisition.
What if private equity isn’t right for my business currently?
Although PE can be a beneficial source of funding, not all businesses are at the right stage of their lifecycle, particularly during the early years. It is important to review your plans and ask questions such as:
• Is the business ready for growth?
• Does the business have a strong and aligned management team not overly reliant on one person?
• Does the business have the infrastructure, capacity and capability to deliver the business plan?
If the answer to these questions is no, it is better to take time to ensure your business is ready before seeking to attract an external investor.
However, if you have an established, profitable company and want to de-risk your financial position whilst rolling over a portion of ownership to benefit from future value growth, then Private Equity could be a viable option. Equity financing places no additional financial burden on the company, since there are no monthly payment obligations, meaning that the company has more free cash available to support growth. Raising capital this way facilitates a longer-term growth strategy, allowing business owners to focus mainly on sustainable value creation without being overly constrained by the need for cash management and adhering to covenants.
In addition to the financial support, Private Equity investors can provide invaluable expertise to support a company’s strategy.
Equity investment is a shared journey where an investor should work collaboratively with a management team to achieve their business plan, as results are optimised when there is alignment in interests and all parties have a common vision for driving the business forward and maximising value.
Maven is an experienced Private Equity investor across a range of sectors, we have a strong team of investment professionals with the expertise to help businesses achieve their strategic goals and maximise growth potential. If you would like to discuss whether PE is right for your business, or for the business you advise, then please get in touch with one of our investment team at funding@mavencp.com.
