Valerie Kendall, a partner at WestBridge Capital, looks at why business owners need to look beyond some of the negative comments and reconsider private equity as a route to growth.
Yet another survey has just been published indicating that in many sectors of the business and financial world private equity firms are generally held in low esteem. Rather dramatically, the latest one concluded that only 10 per cent of those questioned thought the private equity fraternity had a good public reputation.
It has to be said that in some cases, this criticism is justified.
In the heady, pre-recession days, some of the larger houses really did live up to their reputation as short-termist and arrogant. It seemed that they were looking for an exit before the ink had even dried on their investment cheque.
Many of us, who are committed to the deeper purposes of business, had grave misgivings about their ‘get-in, cut costs, get-out quickly’ tactics.
Their over-zealous (some would say greed-driven) approach did lasting damage to what had previously been seen as a useful addition to the box of financial tools available to ambitious management teams.
Regrettably, all private equity houses, responsible and irresponsible alike, have been tarred with the same malign brush.
We are not all the same.
And, yes, I would say that wouldn’t I? But the fact remains, we are not.
The prevailing view is that managements only involve a private equity house when grooming a business for exit, two-or-three years down the track. Of course, there are times when this is the agreed strategy but this misconception discounts a plethora of other benefits that the judicious use of private funding can bring to a company with ambitions to grow.
What is often overlooked is that the moment you decide to introduce private equity into your business, you gain much more than a new supply of capital - you get a new team of colleagues.
The trick is to be selective and chose your new partners well. Consider the candidates as you would if you were appointing new board directors. Ask yourself:
Taking private equity partners onto your board should not be seen as a daunting, confrontational experience. They are on your side. You should all be pointing in the same direction with your goals precisely aligned.
Your new colleagues have much to bring to the table. They will have wide ranging skills and experience, often from other sectors, that will help you to see threats and opportunities in a new light. They may offer possible solutions to your challenges that don’t merely involve throwing money at them.
Being an owner/manager or managing director can put you in a very lonely place, even when you’re supported by a great management team. You are still expected to spin many plates and have a firm grasp on the sales, operations, new product development, industry networking, finance, marketing, human resources ...
What you might not have the time to do is get away from these inward focused responsibilities and lift your head above the parapet to check out your competitor activity, market trends, developments in allied industries, customer movements, opportunities for joint ventures.
A carefully chosen team of private equity advisers will help you with all of these functions – spreading the load, perhaps introducing you to new ways of working. Unlike a bank, a private equity partner will offer advice, judgement and momentum, as opposed to mere liquidity.
Perhaps you’ve always wanted to become more competitive, enter new markets, introduce new products, launch an export drive, invest in new facilities, new equipment or new staff. Private equity teams have a wealth of experience of the benefits and pitfalls of such changes. Maybe you need an all-important introduction to secure a new contract or are thinking about buying-out a competitor.
It could be that you need to completely revise your business model in light of overseas competition or shifts in your core markets.
Your uncharted territory is probably familiar ground for them.
And by far the greatest benefit of working with a private equity house is that they will help your management team introduce structured board room governance into running the business.
Experience shows that most owner-managers love being in business. They love being in the driving seat, seeking out exciting new opportunities, meeting new customers, building their team. The danger is that they have less enthusiasm for the ‘serious’ side of running a business. They see compliance, reporting and financial housekeeping as arduous, time-consuming and tedious.
Private equity will introduce discipline and rigour, which in turn creates confidence - a perfect circle of carrot and stick!
The salient thing to remember is that the use of private equity isn’t limited to periods of management change when a corporate deal like an MBO, acquisition or merger is on the cards. Most will invest where there is an opportunity for growth, irrespective of whether the management team is new or established.
I am an unabashed vocal champion of private equity. It is a robust and sound alternative to other sources of finance.
Banks, despite their PR departments attempting to persuade us otherwise, are still not lending. Even when they do, they aren’t necessarily the ideal bedfellow for an ambitious management team. Even with the most well-intentioned relationship manager fighting your corner, banks still subject businesses to faceless, stringent lending criteria. The banks are the place to go if you want to feel like Oliver Twist, bowl in hand, begging for more. Their teams are made-up of managers, not risk-takers or entrepreneurs.
Think about it. A bank is only ever really interested in the worst-case scenario. That means security for its lending, proof of your ability to repay and getting its money back with interest, not the growth of your business per se. A private equity house has a vested interest in helping your business grow and become more valuable and profitable.
Then, of course, there are alternatives like the Government’s much heralded Business Growth Fund (BGF) which was launched to help kick-start the SME sector by making £2.5 billion available to those needing capital to grow.
The idea is sound enough and the BGF has worked hard to invest in many businesses but it is only offering investments of £5 million plus, which is an already over-crowded sector of the market.
The funding gap has not been closed.
Which brings us full circle.
My partners and I did our homework before we set up WestBridge Capital. We knew that there was a shortage of funding available to businesses needing smaller investments of between £1 and £5 million. Events have proved us right. Since we raised our £30 million SME Fund, we’ve already supported four successful businesses that were having ambitious growth plans strangled by a lack of funding.
They all agree that the fresh capital injection is just one part of the equation. The support, advice, wisdom and experience they’ve had on tap has added at leastas much additional value to their business as their improved liquidity.
So, the next time you hear someone spouting vitriolic clichés about the shortcomings of ‘private equity’, put them straight. All equity houses are not the same.
For some, it’s about so much more than just money. It has a deeper purpose - growth, which as everyone agrees, is desperately needed in our SME-based economy.