Private Equity Investment: More than money

Private Equity investors believe they bring ‘smart money’ to the table when investing to grow a business. Prospective management teams rightly want to understand what this looks like in practice, given the co-ownership and longer investment horizon of PE investment. Academia provide some interesting research into what value PE can bring and we share a few examples of how we work with and support the companies we invest in.

Support: why, where and how?

A growing SME often means management are stretched and filling many different roles. Extra resource and support can have a transformational impact in freeing up management to focus on their core role and objectives. We find the challenges facing companies we work with are common in nature, whichever sector they operate in: growing sales, finding quality people, dealing with difficult customers and navigating changing technology and regulation to name a few. Support required depends on what is happening in a business at any moment and changes regularly. It’s key to respond quickly on issues that come up and help management in whatever way possible to overcome these and move forward. This can vary from acting as a sounding board or finding a specialist, to rolling up our sleeves and actively working on specific projects. Having capacity to support is equally as important as knowledge – It’s no good saying you can add value but not have the time. Basic things like being available to speak at short notice, listening to people and thinking openly and creatively can give management confidence to make better decisions.

What does the research say?

Overall, the value adding theory stacks-up to the scrutiny of academic research which has broadly underlined the benefits of private equity at company level and on the wider economy. Company-level research indicates PE backed firms exhibit increased productivity, stronger growth and greater profitability compared to similar non-PE backed firms. Evidence also points to PE investment driving increases in innovation and employment levels. From our own experience this can be anything from helping companies access government grants right through to assisting on the search for a new hire.

Interestingly, data from the last recession indicated that PE backed companies perform better during financial crises than similar non-private PE backed companies. An important point given the current uncertain economic climate and where we sit in the business cycle. Having a good equity investor can be invaluable in difficult circumstances – equity investors need to work through the good and bad alike and have a vested interest in doing what is best for the company over the long run given a typical 10-year fund lifecycle.

Any examples?

By the nature of our jobs, exit is an area we have a lot of experience of and is usually a first time event for management, examples of support here can include negotiation strategy, information preparation, process management, appointing the right advisors and finding potential purchasers – we have sold three of our Fund 1 portfolio companies to trade buyers based in the US alone. Exits are a very emotive and intense time for management where a calming influence can make a big difference.

Professionalisation is an important step in going from a small owner managed business to a larger more structured business. A solid board and well-structured senior management team makes a big difference. Where appropriate we have introduced industry chairmen to support our companies, these are usually industry specialists who bring specific value to the business, rather than a ‘portfolio NXD’ who has little involvement with the company other than at the monthly board. It’s also fundamental to help keep the entrepreneurial spirit of a small company as it grows.

So what?

Whether it’s a buyout or growth capital transaction, management teams who we invest in are often receiving PE investment for first time – it’s an unknown quantity and can be daunting. The research supports the theory that PE investors add value, and we are fortunate that to a greater extent these findings are reflected in the businesses we have backed. Approaches differ across the industry and it’s good to understand the level and type of support that may be available upfront and how this might be delivered.

We are low volume investors who are passionate about the businesses we work with and proactively do whatever we can to provide support where appropriate, without interfering on the day-to-day running of the business. We back management and provide them with the freedom and confidence to achieve their vision for their business, whilst having the reassurance of knowing we can be called upon to provide the right support at the right time to overcome the challenges that arise along what is an exciting journey.