Could growth capital drive value for you during a downturn?
Private Equity (PE) increasingly comes in different shapes and sizes. Despite the global pandemic, PE has continued to invest in growth businesses to support their strategic plans and deliver value to shareholders.
Mark Allen (pictured above), Corporate Finance Thames Valley Partner at national audit, tax, advisory and risk firm Crowe in Reading writes: The demand for private equity and the differential returns it can offer institutional and private investors compared with public markets has led to more capital being deployed in more creative ways.
As a result, the range of private equity options has never been wider. Competition between funds for new investments has led to more specialist investors (by sector, size, stage or structure), a greater focus on partnering with management teams on buy and build platforms and the acknowledgement of Environmental, Social and Governance (ESG) as a key component of both strategy and value.
Over the past six months, we have already felt the effect of economic uncertainty in both deal volumes and values. Despite the significant increase in the cost of borrowing, PE activity continues to hold up. With capital to deploy and the ability to take a longer-term view, private shareholders are turning to PE as a source of both liquidity and support for their growth plans.
With this in mind, here are five reasons to consider PE in the current market conditions.
1. The challenges of a low growth environment.
Some sectors are more insulated from economic downturns than others, but most will be feeling the effects in some way, whether it is due to cost inflation, recruitment challenges or supply issues. Finding an investor with experience in your sector can help you to navigate these challenges while taking full advantage of growth opportunities.
2. Accelerated growth.
Contrary to popular belief, profit growth is the key driver of returns for PE funds rather than financial engineering. PE will often only introduce debt into the structure further down the line and in some cases, they will not use it at all. They must therefore drive growth by supporting good quality management teams with clear and ambitious business plans. That support can be financial, operational or commercial, but it should be agreed and clearly documented at the outset.
3. Best practices.
Owner-managers are often pulled in lots of different directions and can find it difficult to achieve everything they want to achieve simply due to a lack of resources, including time. Professional investors have deep experience in what resources to bring in and which are going to make the biggest difference, whether that’s investment in people, technology or processes.
4. Planning for a future exit.
Bringing an investor on board can offer you the opportunity to de-risk personally by realising some value now, while also putting you in a better position to maximise value on an ultimate exit. The right investor will buy into your strategic plans and support you in positioning the business for a future exit when economic conditions have improved. As serial sellers of businesses, they will also provide valuable support during the exit process.
5. The range of options.
Whether you are looking for a minority investor to deliver development capital to support or accelerate your growth plans, or a majority investor to deliver a structured buy-out, there are plenty of options out there for you to consider. Experienced advisors will help you to narrow the field and find the best fit.
In summary, while private equity will not be relevant for everyone, it has increased its appeal and can offer both financial and strategic benefits when wider M&A market conditions are weaker.
Crowe’s experienced M&A Team in the Thames Valley would be delighted to start the conversation with you. Please get in touch on 07917 083 810 or email Mark Allen at [email protected]
