Private Equity investment is a bit of a mystery to most business owners. They can be great sources of investment for small and medium size businesses. Private Equity (PE) funds often bring more than just money to the table.
What are Private Equity Funds?
Typically PE firms are a collection of investors who pool funds to invest in specific types of businesses. Individual investors look to aggregate (spread the risk) their investments over a number of businesses and are often willing to take bigger risks as a result. Taking bigger risks means expecting a higher level of return.
PE funds invest where they see the opportunity to grow the business and increase the level of returns. They also look at building a bigger business through acquisition of other businesses that can becomes greater than the sum of their parts.
PE investors are often looking for very specific companies to invest in – they specialise. It may be an industry, geography or business structure that they are interested in. When you understand their purpose and goals, it makes it easier to understand what they are looking for. Identifying those funds that are a good fit avoids wasting time with those who are not.
Some PE funds are willing to invest in businesses that aren’t performing well but have good intrinsic value – a customer base, specific assets, an established reputation or skilled workforce for example. If they see the opportunity to create the returns they are looking for, they will take the risks and invest.
Is Private Equity Investment a good route for you?
As with all buyers, PE investors are looking for a return on their investment. PE firms take a holistic view of the investment they are making in your business and will use a range of funding methods not just cash from investors. Any acquisition is usually through a combination of investment and debt from other sources. Debt comes into the business easier because of the involvement of the PE firm.
They still look at the risks involved in the investment. Due diligence is still undertaken and the sale process still has some difficult aspects for the seller. It’s an in-depth look under the skin of your business. The more prepared you are then the easier it will be but it will never be easy.
PE funds may not want to buy 100% of your business in the first instance. It may be an option to sell part of your business now and more of it later. Where a company has growth opportunity with the right investment, a PE purchase of a minority interest can be an effective way of getting significant investment without the business owner taking all the risks. Consider whether this is an option for your business and how that will impact you before you go to the market for PE funding.
What Are PE Funds Goals?
Every PE fund has their own individual goals depending on their investment strategy. Unlike Small and Medium Size businesses, they have all been designed with the end in mind – they know at the beginning what they are trying to achieve. It’s a structured process.
Investment strategies range from defined “sell by” dates through to specific return targets. It’s important to understand these goals when you are attracting PE investment. They will have raised money from their investors based on these criteria.
Targets for investment can include:
- Company size
- Industry sector
- Geography
- Revenue source and risk
- Strength of management team
- Profit improvement opportunity
PE firms don’t just make their money on the return on their investment. This is an important factor often misunderstood by business owners. They also take management fees from the business for managing the funds invested in the business. At exit they will also take a success fee.
Summary
If there is a good fit of goals and strategy, Private Equity investment is an opportunity for business owners to achieve more than they would do on their own. Having an understanding of the needs of the PE investors BEFORE engaging means the journey will be more enjoyable and more rewarding.
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