Laura Falls: Don’t be afraid of using private equity to grow your business
Laura Falls discusses the challenges Scottish businesses face in funding growth ambitions, particularly the underutilisation of private equity (PE), and provides tips for companies considering PE investment to address potential misunderstandings and mistrust.
Addleshaw Goddard partners with the Fraser of Allander Institute to produce the quarterly Scottish Business Monitor, the most recent of which showed nearly half of firms in Scotland had cancelled or delayed planned investments in the past 12 months. At a time when economic growth is flatlining, that’s not what we want to hear. However, we know businesses want to grow – 42% of firms in the report said they were likely, or very likely, to engage in business investment over the next year.
Funding growth ambitions is a big challenge, one which advisers including corporate lawyers often help clients address. One startling statistic was that only 4% of the businesses who plan to invest this year were considering using private equity.
PE backing can be a great way to realise capital to fund growth, allowing for capital expenditure, acquisition activity and recruitment as well as realising some value for shareholders. So why is it not more ‘popular’?
I think the reluctance reflects something of a misunderstanding, and perhaps mistrust, of what PE involves and what it can potentially do for those receiving investment. With that in mind, here are five top tips for companies to consider about PE investment – that might spark deals this coming year!
- Growth: any PE investor will want to see a clear growth strategy for your business. They are seeking a return for their investment so businesses need to be ambitious and hungry to drive that growth journey forward. Tap into the knowledge and experience of your investor; it’s a great opportunity to hear about successes and failures.
- Information: an investor is likely to take a seat on your board but won’t be involved in running your business day-to-day (although they will require consent rights in relation to material decisions). However, they will want to be kept informed and you will likely experience a more structured approach to corporate governance (a good thing), requiring regular board meetings with agendas and board packs. You will gain from being well-prepared as the structured approach shapes strategy and growth.
- Share share share: linked to the above, don’t be afraid to overshare information and updates. It is ok for everything not to be perfect and investors would rather know about any issues that arise. They want your business to grow and succeed and will want to work through any problems with you.
- Learn the lingo: you’ll come across terms and acronyms you may not be familiar with if looking at PE investment: Adjusted EBITDA, IM, fireside chats, EV to equity bridge, IRR, rollover, sweet equity, bolt-on and leverage … Use your professional advisors to help understand what these phrases mean, how processes work, how PE achieves growth and then utilise them to your advantage.
- Back the PE House: generally, a private equity investment will last 3 -5 years, but it can be much longer and sometimes shorter. You should make sure you get to understand the investor, what their priorities are, what they can bring to your business and your management team and look at what they have done in the past. Again, your advisers can provide invaluable input here – be prepared, do some homework and think about your key red lines, items that you won’t want to compromise on.
Laura Falls is a partner at Addleshaw Goddard