Private Equity investment: being “investor ready” and picking the right investor
Private Equity investment: being “investor ready” and picking the right investor
Completing a Private Equity (PE) deal process requires significant amounts of time and effort on the part of both the PE house or fund and the management team of the prospective portfolio company. One of the most consistently cited reasons for the deal process failing is that the prospective portfolio company is not “ready” for a PE investment.
If you are considering PE investment for your business, there are some simple questions you can use to assess whether you are “investor ready”. Your honest answers to these questions will help you both understand your state of readiness and help focus your efforts to effectively prepare for investment.
A management team for Private Equity?
Your management team must have depth and breadth in terms of both skills and experience, and personality. Investors will be nervous if your business is dominated by or is too reliant on a single individual who controls other members of the senior team.
A business must have a leader but the whole management team must contribute and be effective across the main functional areas such as operations, sales and finance. Recent challenges have also made investors keen to understand how your management team has responded to crises and volatility in the past. Can your leadership demonstrate an ability to respond to unexpected challenges?
However, a PE investor will not be put off by the need to fill some gaps in the management team. A PE House will often be able to add value by attracting the right quality executives to the business.
What are the right strategic priorities for Private Equity?
Your strategic priorities must have a material impact on the growth of your business. Appropriate strategic priorities are goals such as geographic expansion, product extension or making acquisitions. Your strategic priorities cannot be a tactical “to-do list”. Furthermore, these priorities must have a demonstrable impact on both the future revenue and profitability of the business.
Strategic priorities require an element of choice. Having too many strategic priorities can be as bad as too few or none at all! It will be enormously attractive to an investor that you have thought through and agreed a list of meaningful strategic priorities ahead of any investment. It will give the investor confidence that you are focused on growth and are ready for investment.
Have you got quality management data for quality business decision-making?
Few things will make private equity investors more nervous than a leadership team that rely on intuition more than data. Potential investors want to know that your management team have access to and make effective use of timely and accurate data. Data about every aspect of your business, such as operations and sales, is what will enable your management team to make the decisions that will drive the levels of profitable growth that private equity investors will expect.
You may need to invest in the technology, processes and people that deliver that crucial business information to your management team. The investment will prove invaluable notjust in preparing for and securing the PE investment but also in improving how your business is run.
Does your management teamwork “on” as well as “in” the business?
Do you regularly create time for the leadership team to discuss the business’s overall direction of travel and its strategic progress? In many growth businesses with limited resources, the leadership team fail to find time and space to step back from the day-to-day challenges of running the business. An investor will not expect you to hold monthly board meetings, this practice can be developed post-investment, but the discipline of devoting time to your strategic direction and priorities will be well received.
Do you have medium-term financial forecasts?
Not many privately owned high-growth businesses have medium-term financial forecasts. But PE investors usually have a 3-5 year horizon for holding an investment. A medium-term financial plan will underpin their investment and the shape of any future returns.
Medium-term forecasts cannot just be based on a top-down view. For example, “Sales will grow at 20% per annum” is not a solid forecast. There should also be a bottom-up analysis with carefully considered assumptions around the level of overhead investment required to support top-line growth.
Do you know your customers?
This may appear to be an odd question, as most businesses will claim that they know their customers very well. A key characteristic of successful businesses is customer insight. Do you know precisely what services are used, how much profit is made from each customer, the cost of acquiring new customers and the potential for selling other services? The more you understand your customers and how they use your products or services, the better you will be at retaining and winning business.
If you can answer “Yes” to the questions above, you are on your way to being ‘investor ready’ and a more attractive proposition for potential investors. Finally, even if you don’t go for or get PE investment, your business will be more effective and profitable if you can answer yes to these key questions.
Have you found the right Private Equity investor?
The first part of this article was about how to make sure that you and your business are investor ready. The better prepared your business is, the easier you will find it to attract private equity investors. If you are fortunate enough to have the growth prospects that attract investors, you will need to think about selecting the right one.
Here are some suggestions to help you make the right choice. There are aspects of the PE house strategy and performance that you should scrutinise as carefully as the PE house will scrutinise your business. Doing your homework will help you find the right investor. Remember, you will potentially work with your new PE partner for as many as five years.
Hitting the sweet spot?
You need to understand the investor’s funding ‘sweet spot’. Private Equity funds will have a range for how much they will invest in each deal. You are looking for a deal that is important enough to matter to the fund while allowing room for future funding.
Strong track record?
Does your fund or investor have a good track record of successful investments in businesses like yours? For example, you could ask for details of the returns made from the last fund.
Genuine market insight?
A PE house with genuine sector expertise to be able to demonstrate numerous deals over many years in the market, a demonstrable understanding of the issues facing your sector and that they are well connected with industry executives and non-executives.
Involvement post deal?
How will your investor be involved after the deal is done? Will the investor take a board seat? How much interaction will there be with the management team?
Many PE houses have dedicated portfolio teams tasked with managing the investment in your business. You need to start working with the portfolio team as soon as possible as they will shape the PE house involvement and develop a strong working relationship with them.
PE House support for you and your business?
What kind of support are you looking for from an investor? This could vary from helping to build sales or finance capability or supporting the development of an acquisition strategy.
The type of support you want from an investor should be a criteria for judging potential investors. How much experience do they have of successfully providing the kind of support you need? Don’t hesitate to ask to speak to existing investee companies to validate what you are being told.