Let’s talk about Private Equity…

A divisive topic, of course.  But as we completed our 3rd private equity (“PE”) deal of the year in December, each providing a very different solution for the business, we felt it was time to peel back the onion.  They are difficult, challenging deals to complete for owners, management and advisors.  But is the effort worth it? What does PE offer? And who should consider it?

Private equity is often talked about as it is one specific thing, but in reality there are a range of varying types. Here’s a few…

• PE Funds – these are probably the ones we hear most about, but even they come in many flavours, from different deal sizes in the billions down to the few million, different sectors, education to software, facilities management to accountancy firms, and also varying deal structures such as minority or majority investments.
• Deal by Deal Investors – these are often structured in the same way as a PE Fund, and from the outside often look identical. The difference is that they don’t have a fixed fund, but more a pool of investors from which they can draw investment depending on the deal.  This may sound a bit flaky, and sometimes it can be, but many of these teams have been around for a long time so can demonstrate a good track record.  The benefit over a PE Fund is that there are no fixed criteria, so these teams can be more flexible to adapt to different situations which can be helpful.
• Family Offices – much more under the radar, but increasing in number, and they provide a slightly different type of investor or buyer. Sometimes they offer sector expertise, often they are looking to hold businesses for longer, and they may be happy with slightly lower returns than PE Funds depending on their investment thesis.  So they can be a good solution for robust businesses, but maybe don’t have the growth profile that PE Funds are looking for.
• Search Funds – a Search Fund is essentially an individual or small group of investors who are looking to buy a business. They have typically had some industry experience, often have been to business school, and decided they want to run their own business.  They have spent time gathering a group of investors who are willing to fund them to do that.  Search funds typically suit retirement sales where the sale of the business leaves a hole in the top role, and they can naturally step in.  While this type of investor is long established in the US, it has only really gained traction in the UK in recent years as the quality of people leading the search funds has increased.  There are some very impressive search fund individuals and teams out there at the moment.

So having looked at the different types of funds, let’s use our deals this year to play out three different scenarios on what a private equity deal can look like…

1. The phased exit…

In February we advised Functional Gut Group (“FGG”) on its investment from Foresight, a well known PE Fund here in the East and nationally.  In this example, the founder of FGG and his wife owned 100% of the business.  The business was successful and growing, with plenty of opportunity, but it posed two challenges.  All of the family wealth was tied up in the business, and even when reinvesting cash generated by the business,  there were opportunities for growth that the business couldn’t fund.  So how could PE help?  In this case Foresight solved those two issues… it acquired some shares from the founders, giving them some cash to bank and de-risk, and it invested funds to drive a faster pace of growth.  The founder and Foresight will now work in partnership over the next few years to drive the growth plan, before looking to sell to another investor or buyer in due course.

2. The buy and build…

Many small businesses operate in a fragmented sector, lots of companies all with a small market share.  They can see the opportunity for consolidation to improve service, business economics and competitive advantage, but how can they make an approach to buy a competitor with no money?  “Buy and build” as PE like to call it is a long-established model for them.  They love investing in ambitious management teams with a good “platform” company, giving them the firepower to go and buy other businesses.  This trend, largely driven by PE, has been in evidence across a number of industries in recent years from dental, to veterinary, wealth management, accountancy and most recently in the legal sector.  In September we advised Greenwoods, a leading mid-market law firm, on their investment from Gresham Capital to give them the funds to go and make some strategic acquisitions.

3. The succession…

The final deal type which is tricker for PE is when an owner or CEO wants to retire as part of the deal.  Typically they want continuity with the CEO staying on to lead the business post investment. In December we advised the shareholders of Charis Grants.  As part of this deal the CEO wanted to retire leaving a gap in this key leadership role.  This certainly put off a lot of the usual PE Funds, but if you have read this article properly you might say, isn’t this a perfect scenario for a Search Fund?  And it was, we had a lot of interest from some excellent Search Funds, but in the end our best offer came from a Deal by Deal investor, Chiltern Capital, who really liked the business and started a search for a new CEO as soon as they entered exclusivity.  The result was that the day the deal concluded, the new CEO started and with a period of handover and a smooth transition was achieved.

So in summary, PE deals aren’t easy to navigate.  From getting the preparation and initial pitch, to understanding the structure of the offers (valuation, rollover, loan notes, interest paid or rolled, it’s a whole new world), and navigating lengthy due diligence processes, they are not for the fainthearted.  But they can provide excellent, creative, flexible solutions to fit the needs of business owners, so should not be dismissed.

For any business owner looking at future options we advise sitting down with an advisor early, bring them into your thought process, share ideas and discuss what you want, and what the solutions might be.  And you never know, one of them might be private equity.