With the recent news about WiggleCRC and 300 potential redundancies for one of the hardest hit areas of the local economy, it is easy to understand why many home grown businesses are sceptical of private equity investment. Yet, it is exactly this type of investment which could propel a successful company to the next level through not only the equity investment in the business, but the expertise and industry knowledge to the boardroom.
So how do private equity firms add value?
Private equity adds value to a company in a variety of ways. The private equity company through its due diligence exercise will be able to highlight a company’s strengths and weaknesses, and should have in-place viable solutions to the issues, and a robust business plan to take advantage of the market opportunities – which may have been out of reach originally due to a lack of capital or in-house expertise. The ‘been there, done that’ expertise being a key value-add of private equity funding over traditional bank funding.
A ‘common ownership’ approach between the investors and the original company management team, with a clear governance structure (including outlining decision making powers), an effective organisational change model, defined goals and incentives, and of course the investors resources, leads to companies with private equity investment outperforming similar companies with relative benchmarks.
Does equity investment equal a loss of control for existing shareholders?
This perception is often a major inhibitor to family businesses looking for equity investment, but our experience is that in the normal course of trading it is definitely not the case. The most successful equity investments that we see are those where the investor has a great working relationship with the company’s management team from the outset, and an alignment of interests that helps to fuel the company’s growth. Most investors would agree that regardless of what the legal documents say, real control lies with the people who run the business day to day. For that reason most investments are heavily based on the investor’s faith in the management team. In the event that the relationship does sour the protections granted to both parties in the investment documents should provide a road map for resolution, and so require careful consideration at the outset.
Beyond that, the importance of choosing the right investor (that the management team is confident about working with) and having experienced professional advisors (who can provide advice on ‘industry norms’ and help to find workable compromises in deal negotiations) is essential.
Recent examples in Northern Ireland where a strong relationship is bearing fruit and leading to growth and job creation include Hg Capital’s investment in Relay Software (and the subsequent onward sale to Applied Systems), Lyceum Capital’s investment in TotalMobile and MML Growth Capital’s investment in Lowe Refrigeration. Just last week it was announced that the Belfast firm TruCorp was acquired by private equity syndicate Cordovan Capital Partners.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.
