Private Equity: A Gold Mine Waiting to be Exploited?
Economic growth was slow before the pandemic, but the resultant lockdown and social distancing will undoubtedly create more drag. It was hard to grow quality companies before COVID-19, now it will be even harder. Yet there is a real solution in the estimated £2.3 trillion of Private Equity (PE) and Venture Capital (VC) dry powder in Europe alone looking for a home in private companies. Companies can use this capital to develop new territories, invest in new products and acquire equipment, talent or services to fire up company growth. With the right investments, private equity can secure yields unattainable elsewhere and help make substantial growth a reality.
A win/win, yet there is a challenge. Entrepreneurs still perceive private equity investors as people who extract value rather than create company growth. If private equity continues to be driven by their traditional models of yields, cost of capital, and excel spreadsheets, they will simply fail to change this notion and thus engage companies and leaders.
The resulting ‘stand-off’ should and can change. Building a successful small enterprise takes vision and determination, however taking a small company to the next stage of its development requires a different skillset and money, particularly in volatile markets. Capital is the fuel that fires up company growth, and without it, reaching that next level is either a real challenge or takes too long and can lead to missing the opportunity entirely. Bank support helps but is often highly protracted and cautious.
Post-COVID-19 the conversation needs to change. Private equity investors already pitch that they add value, yet in negotiations risk still sits central to their diligence. They fail to adequately demonstrate how they can bring critical resources, ideas and contacts as well as capital to fire up company growth. The truth is the process of investment management is led by financial professionals and they can lack the flair and spirit to win entrepreneurs’ hearts and minds. The shared vision and business plan are rarely referred to or built up, yet getting this right is how investment opportunity is won.
At the same time, entrepreneurs fail to pitch to investors, often scared by investment industry jargon, complex deal structures, costs, and models that do not make sense on the face of it. They then balk and sit with the status quo or worse, do not even explore their options, yet minds work best when they are open. The result too often is that company growth plateaus or hits a glass ceiling due to the lack of open and understandable conversations.
The Covid-19 Factor and the Opportunity it Brings
One of the solutions after the COVID-19 driven economic crash will be marrying these components better by both sides realising they need to change their conversations. Entrepreneurs need to be more open to what capital brings and recognise that it can really fire up company growth. Furthermore, they can employ expert advisors to help with translating the vision into forecasts and vendor due diligence to ensure they are investment-ready.
Investors need to accept that whilst models and forecasts are important, risk is a fact of enterprise and they must start understanding that in the end, they are backing people with vision and determination. A good idea is a good idea; how much of a model does it take to demonstrate that? Common sense and an instinct for what customers want now and tomorrow is what is often missing.
Securing growth capital can be a great way for entrepreneurs to de-risk and release value today whilst also injecting vital expertise and money to take the business to the next level. Avondale recently assisted in the sale of NDSR, a Veterinary Hospital, to Linnaeus Veterinary Limited backed by Sovereign Capital Private Equity. As well as ‘cash out’, our clients took a minority stake in Linnaeus as part of the deal. Since then, the Linnaeus Group had grown from 120 to 1400 staff and increased EBITDA by more than 700%. For our clients, the initial sale enabled them to de-risk, but the additional backing and capital more than fired up growth; the business simply grew beyond all expectations.
For both sides, satisfaction is not attained through doing deals, nor simply in the accumulation of assets. It is built around relationships which leads to an enriched experience and company growth. The combination of added value investors and world-class entrepreneurs may also be just the tonic we need to fire up the economy post the pandemic.
We have launched our ‘Lead Ahead’ Webinar Series in line with our weekly articles. Join our ‘Private Equity Demystified’ webinar on the 4th November for a deeper dive into the myths and truths of Private Equity investments.
For information on other webinars within the series, visit our Webinars & Events page.