Posted: 22 October 2020

Private equity – so much more than just money

Private equity – so much more than just money

James MacLeay, investment manager at WestBridge, takes a look at why business owners should consider private equity as a route to growth.

There is a widely held view that management teams need only involve a private equity house when they’re grooming their business for an exit. Of course, there are times when this is the case but this misconception discounts the numerous other advantages of private funding. 

The private equity option should be in the toolbox of any ambitious management team with an appetite for growth.

Who comes with the money?

Introducing private equity means you gain much more than a new supply of capital. You also gain a group of new colleagues with a raft of experience upon which to draw.

The trick is to be selective in your choice of partners. Consider the candidates as if you were appointing new board directors. Ask yourself:

  • Can I work with these people?
  • Is there natural chemistry between us?
  • Do they have the experience we need?

Taking private equity partners into your boardroom should not be seen as a daunting experience. You are gaining colleagues, not adversaries. Just make sure you all share the same goals. I’ve heard of situations where the directors have been set on using their new capital to diversify by acquiring new businesses, while their new private equity partners are equally intent on consolidation and disposal of interests. Not a good start.

Being an owner/manager or managing director can be lonely. Even with a great management team, you are expected to keep a firm hand on the tiller and all the plates spinning. You may need to distance yourself from day-to-day affairs occasionally, to find time to think about broader issues like strategic growth.

Carefully chosen private equity investors will help spread the load, perhaps by introducing new systems or ways of working. Unlike a bank, a private equity partner will offer advice, judgement, perspective and momentum, as opposed to mere liquidity.

Perhaps you’ve always wanted to become more competitive, enter new markets, introduce new products or invest in new facilities, equipment or staff. Private equity teams bring valuable experience of the benefits and pitfalls of such changes. Maybe you need an introduction to secure a new contract or perhaps you’re thinking of buying-out a competitor. 

What’s uncharted territory to you is probably familiar ground to them. 

Most owner-managers love being in the driving seat but often have less enthusiasm for the ‘serious’ side of running a business, seeing compliance, reporting and financial housekeeping as time-consuming and tedious.

Private equity investors introduce stricter governance and rigour which in turn creates confidence, stability and a scalable business model.

Top twelve uses of private equity

Think of private equity, venture capital or institutional investment and your mind probably turns to funding for a major restructure; a management buy-out, merger or other such corporate activity. Well, it’s time to think again.

Increasingly, private equity houses are supporting management teams with much more than just cash for corporate deals. Here are some of the less well-known uses of private equity:

  1. Funding R&D into new products
  2. Strategic acquisitions
  3. Diversifying into new products and regions
  4. Growing the management infrastructure
  5. Training second tier management for succession
  6. Strengthening the balance sheet by rebalancing borrowings
  7. Launching an export drive
  8. Modernising facilities, equipment and systems
  9. Increasing stock levels to satisfy a full order book
  10. Reviewing and changing a threatened business model
  11. Commercialising scientific advances
  12. Aggressive marketing
Select your partner well

Having decided what you need more funding for, it’s worth spending time researching and selecting the right private equity house for you. First, meet the individuals who you’re considering working with, then contact other companies they’ve helped - just as you would normally take up references. Always ask rigorous questions about their experience and expertise. This is normal practice.

Much like all business relationships, don’t underestimate the value of personal chemistry. 

Inevitably, the relationship won’t necessarily always be harmonious – you will clash, you will disagree – but provided you share a common goal and mutual respect, these will be minor, surmountable and ultimately constructive hiccups along the path to growth.

Other sources

Private equity is a robust and sound alternative to other sources of finance. Whereas banks and financiers will remain passive or a single ‘angel’ investor may become overbearing or even dictatorial in their efforts to keep a handle on ‘their’ money, private equity partners have a vested interest in helping your business grow to become more valuable and profitable.

Banks, despite what their publicity may say, can be difficult business bedfellows. Their teams are made-up of managers, not entrepreneurs and risk-takers. Ultimately, banks are interested in getting their money back, with interest, not the growth of your business. 

WestBridge was set up in the full knowledge there was a shortage of funding for businesses needing investments of between £10m to £20m. 

Since raising our two Funds, we’ve supported many established, profitable and ambitious businesses. One of these, Aero Stanrew, designs and manufactures specialist electronic components for the global aerospace and defence industry. We helped the management team achieve specific objectives by bringing fresh eyes and applying old-fashioned business sense. WestBridge and the management team realised their investment in the company when it was acquired by TT Electronics.

To conclude, it’s worth hearing what the company’s managing director, Clive Scott, said about us:

“We had many private equity houses courting us but chose WestBridge for a number of reasons. They ‘got’ our business. Even before we selected them, we were impressed by the ideas they put forward. The extent of their contacts and experience meant that they could add real value to the deal.

“Yes, their capital was most welcome but having their support, advice, wisdom and experience on tap was of far more importance and value to us.”

 

Typically, we invest between £10m to £20m in established, profitable and fast-growing UK SMEs with enterprise values of up to £40m and are always keen to hear from ambitious management teams that require development capital, acquisition funding or support for a management buyout. To hear more about our investment criteria or discuss the suitability of a company, do get in touch.

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