Private equity firms invest funds raised from institutional investors (such as pension funds, family offices and charitable trusts) in to privately held companies with the goal of sustainably growing or improving that business and creating value.
The landscape in which private equity operates in the UK has dramatically changed in the past two decades. Both the amount of capital available to invest and the number of Private Equity houses investing in UK companies has grown since the financial crisis in 2007/08. As the PE industry has grown and matured, the prevalence of investing and supporting family-owned business has also grown. However, misconceptions about the private equity industry still exist which may be hindering succession and exit options for a family business.
With the recent tax changes, some family businesses may be considering wider options for the transition of the business. This article attempts to de-bunk some myths around private equity and highlight some of the key benefits that working with a private equity fund can bring to a family business.
Myth 1: Private Equity Investors Are Short-Term Focused.
Although Private Equity investors are only temporary custodians of a business, their main goal is to drive long-term, sustainable value. This will involve working with management to create a value creation plan which sets out how the business will achieve its long term strategy and be in a better position than when the private equity firm firsts invests.
The goal for investors is to create value, not just while the business is under private equity ownership but to also demonstrate value for its future owners. This often includes investing in people, supporting capital expenditure projects, targeted bolt-on acquisitions and other long-term commercial and operational initiatives.
Myth 2: Private Equity Firms Bring In Their Own Management Team To Run The Business.
A suitably incentivised management team is a key part of any investment story and the success of the business is reliant on that team to effectively execute the value creation plan. Private Equity firms are looking for strong management teams to back but can also be flexible around the circumstances of individuals within a team who may be looking to transition away from the business. Private equity firms can help strengthen corporate governance by providing additional expertise through specific non-executive support to help bolster a leadership team, if required.
Myth 3: Private Equity Firms Only Look For High-Growth Tech Companies.
Wrong! There are many different types of private equity funds, all of which will have a different investment strategy, covering all sectors and life-cycle stages. In contrast to Venture Capital funds who invest in start-up/early-stage businesses, Private equity funds typically invest in established businesses.
Myth 4: Any Deal Will Take Too Long To Complete And The Information Requirements Will Distract From The Running Of Our Business.
PE investors are experienced deal doers and aim to minimise distraction to businesses and management teams. For example at Endless we have a dedicated Financial Due Diligence team and are able to fully fund a deal ourselves which allows a streamlined process and keeps disruption to a minimum.
Myth 5: Will Our Company Balance Sheet Be Loaded With Unsustainable Levels Of Debt?
Typically, a Private Equity fund will use a mixture of debt and equity to fund a transaction. The Private Equity investor will look to create a capital structure that provides the business with funding for growth and carefully manages debt-service costs. One of the key aims of a Private Equity investor is to improve the company’s financial health.
Deciding to pursue third party investment for a family business can be a really difficult decision, so finding an impactful, energetic and empathetic partner to work with during the transition is vital. Partnering with a private equity investor can provide a good option to ensure the smooth transition of ownership whilst securing an injection of capital to allow the business to pursue its growth objectives.
About The Author: Rosie Ramsey is an Investment Manager at Endless LLP, a private equity investor who are looking to invest between £1m and £100m in to UK businesses across a variety of sectors with revenues of £15m to £1bn+.
Endless take a hands-on approach, working with founders and Management teams to ensure the value they have created is protected and there is a smooth transition to new ownership. They offer a solution where the family's legacy remains intact, and the business's growth potential is maximised through access to capital, knowledge, skills and a broader network of business professionals. Endless’ impact is not just to provide capital and investment but also invaluable support and expertise.
The team at Endless are always happy to discuss how private equity could be part of your succession story. If you would like to talk confidentially to explore whether private equity could be the right home for your business, please contact Rosie at roseanna.ramsey@endlessllp.com or visit their website here
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