10 PAUL MORRIS: DEMYSTIFYING PRIVATE EQUITY – AN INSIDER’SVIEW
FIVE COMMON MISTAKES TO AVOIDWHEN PITCHING TO PE
The prospect of raising PE investment can be both an exciting and daunting experience, even for an experienced and successful management team. Success requires weeks and months of preparation – developing a credible growth story, putting together an engaging investor pitch book and readying the business for the intense scrutiny of due diligence. But all your good work can be undone by avoidable mistakes when you pitch to PE firms. Here I explore five of the most common mistakes and advise on how to avoid them.
01
BUYER AND SELLER?
An inherent conflict arises when you, as the management team, already hold some equity in the business. Any deal with a PE firm will involve selling some of this equity and re-investng the remainder into the new deal. This type of deal is commonly referred to as a “money out” or “shareholder realisation”. The problem is that you are wearing two hats: you are both sellers who is looking to maximise the price for the equity being sold; and buyers who wants upside from the shares held in the business going forward. PE investors will always want you to have significant “skin in the game”. They will be focused on the returns generated in the future and will want you to have similar priorities. If you place too much emphasis on the cash realisation element of the deal rather than the future upside, this will be a red flag for many investors. It will suggest that future growth is less important to you.
02
BALANCING REALISMAND AMBITION
Your medium term financial forecasts are fundamental to a PE firm’s appetite to invest. These forecasts articulate the future growth strategy and the anticipated returns for shareholders.
The mistake often made when pitching to PE is making forecasts either: Over Cautious – unexciting growth rates, probably in single digits annually, because the team want to have the scope to over perform. Management teams often believe this will be viewed favourably by their PE investor. The risk is the forecasts, and potential returns, will not be enough to attract an investor. Over Ambitious – in this scenario the desire to excite an investor loses all perspective and the resulting forecasts are too aggressive. Tenfold increases in profit over 4 years may look attractive but in most cases lacks credibility. You need to find a middle ground where the forecasts are positive enough but will also stand up to the scrutiny of any due diligence exercise.
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