13 PAUL MORRIS: DEMYSTIFYING PRIVATE EQUITY – AN INSIDER’SVIEW
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HITTING THE SWEET SPOT?
INVOLVEMENT POST DEAL?
You need to understand the investor’s funding ‘sweet spot’. PE funds will have a range for how much they will invest in each deal.
How will your investor be involved after the deal is done?
Will the investor take a board seat? Who from the PE house will be appointed? What type of board meeting will occur and how often? How much interaction will there be with the management team? Often, PE houses have dedicated portfolio teams, focused is on managing the investments made. The portfolio team will take over from the investment team that you may well have built a strong relationship with. I would always advise that the handover from investment to portfolio team is done as soon as reasonably possible, preferably ahead of the deal completing. This will allow you to develop a relationship and settle the questions above.
If the deal is at the lower end of their range, will the investor give the business enough focus going forward? If the deal is at the higher end of the range, there may not be sufficient appetite for follow-on investment. You are looking for a deal that is important enough to matter to the fund while allowing room for future funding.
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STRONG TRACK RECORD?
Does your fund or investor have good track record of successful investments in businesses like yours?
THE APPETITE AND ABILITY TO SUPPORT THE BUSINESS?
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Your potential investors will not hesitate to judge your company’s historic financial performance. So you should consider applying the same lens to your choice of investment partner. You could ask for details of the returns made from the last fund.
What kind of support are you looking for from an investor? If you are an earlier stage business, you may want more in the areas of building sales and finance teams. A larger and more established business may need help with an acquisition strategy and international expansion. You need a clear idea of the type of support you want from an investor. This can become a criteria for judging potential investors. How much experience do they have of successfully providing the kind of support you need? The COVID -19 pandemic has raised another area of focus – how supportive has the investor been with existing investee companies, in circumstances which are beyond the control of the management team. Don’t hesitate to ask to speak to existing investee companies to validate what you are being told.
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GENUINE MARKET INSIGHT?
Many PE houses will cite sector specialism as a point of differentiation. Here are the things I would expect a PE house with genuine sector expertise to be able to demonstrate; X Numerous deals over many years in the market X Well connected with industry executives and non executives X Demonstrable understanding of the issues facing your sector such opinion pieces or published articles It takes more than a couple of relevant investments to develop the level of knowledge that is going to really help your business.
IT’S ONLY FAIR.
Management teams will be heavily scrutinised by PE houses. It seems fair that teams should apply a similar level of scrutiny to these potential partners! The questions that need to be asked should not just relate to the terms of any offer but also to the areas I have highlighted in this blog.
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