Building your business with private equity

COVID-19 has changed the rules – access to markets has been restricted, consumer behaviour has been modified and the outlook is uncertain. However, if you’ve managed to tough it out this far, now could be a great time to seek private equity (PE) funding in order to fast track growth in your business or alternatively de-risk your personal investment portfolio, but you must get the timing right.

We’ve been talking to a lot of CEOs over the last few months to gather their perspective on recent events. One of the things we’ve been most impressed with is how quickly many have adapted to the new circumstances. In the longer term, the winners will be those who do just that. They may come out bruised, but will emerge in a market which is a lot less cluttered with competitors and that may offer new exciting opportunities for growth. With the increase in digitisation plus smarter working, the most agile businesses are likely to come out on top. For example, a luxury consumer product manufacturer we know has switched to producing air sanitisers. The owner plans eventually to go back to the original product portfolio but he was quick to match his skills and resources to the needs of the market.

Another CEO talks about having recently joined a long-established business where remote working was out of the question pre-COVID-19. The lockdown meant that suddenly his entire workforce had to work from home but, despite this, the company continued to operate without issue. He sees this as a great opportunity to reset and change how things are done, modernising processes without compromising the business.

For many businesses the ‘new normal’ will present plenty of opportunity to grow – and quickly. This could be through the acquisition of a failing competitor or stepping into a new market that would previously have been impenetrable. But in order to achieve this, businesses will often require a significant injection of funding – which may not be available from a traditional bank or through the cashflows of the business. For ambitious shareholders in this position, now is a great time to consider private equity as a route to securing additional funding that will enable the business to make a significant step change.

We’re in the midst of one of the most extraordinary and challenging times in history. In this environment, being the owner and CEO of a company you’ve built can be lonely at times and particularly challenging if all your individual/family wealth is locked-up in the business.

A private equity provider can help you de-risk your position and allow the founders/shareholders to realise some value for all their hard work, whilst also providing a source of funding for business growth and providing a broader skill set around the boardroom table. Being part of a private equity firm’s portfolio may also present opportunities to meet your peer group where new ideas, useful contacts and fresh perspectives can be drawn upon.

PE funds are currently actively seeking investment opportunities, so it’s a good time for resilient businesses that have been trading well over the last few months, and who may be looking for funding, to start the process now. The general feeling in the market is that the landscape for seeking equity finance is starting to pick up; after a barren few months PE funds will be keen to do deals again and will still be open to paying a good price for what they regard as an attractive asset.

Conversely, for businesses in specific sectors it may pay to wait a few months to secure the right valuation. It is likely that in the immediate post COVID-19 period it will be harder to demonstrate with certainty the underlying quality of earnings and growth trajectory, and therefore valuations may reduce. As employees return to offices there are also likely to be other factors at play, which shareholders and CEOs will need to deal with. It is difficult to know how some employees will settle down – for example, those that have been furloughed could feel let down or destabilised and there is always the prospect of redundancy for some. As a result, it is difficult to predict how and when some businesses will bounce back depending on the sector they are in. For some, valuations are likely to continue to be tricky for the next six months or so and it might be wise to wait before approaching an investor.

If you are actively seeking PE investment it’s important to secure early input and advice from an experienced corporate finance team so that you can plan appropriately. You will get a better and more deliverable deal with professional support than by trying to go it alone.

Although some shareholders will already have a trusted adviser, most will not have been through this process before. It is important to check out the credentials and the personality fit with the adviser you choose to work with. If in doubt, most business leaders will have a good relationship with their bank or lawyer, who will understand the landscape in terms of high-quality corporate finance advisers.

At an early stage, it’s important to consider how much funding you need and why. An investor will want to see a clear plan as to where the potential growth opportunities lie and how you will deliver them. You need to think about what you might need in terms of resources such as staffing, office space or IT skills to deliver the plan. The ability to demonstrate this succinctly and confidently as well as show passion, enthusiasm and drive will often make the difference between securing PE funding on the right terms or not.

For more help with seeking PE funding contact Mike Hughes, Corporate Finance Director at Grant Thornton. Email mike.hughes@uk.gt.com