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Private Equity: Choosing an Investment Partner

September 26, 2023

Although private equity (PE) is often seen as a milestone funding achievement, it does not guarantee growth. To maximise returns, companies must ensure they select investment partners that complement their corporate identity.

 

Starting considerations
First and foremost, a company should analyse their own needs.

Given the varying structures of PE funds, a company’s reasoning for raising capital is crucial.
Reasons may include growth equity, personal liquidity, management buyout, or even a
combination of the three. This will influence what type of investor should be sought and
whether equity in a control or non-control position is most suitable.

Companies must also consider their target industry and business life-cycle. As PE firms often
target their services at specific sectors and company stages, it is essential that a company
accurately communicates its status and interests to investors.

More widely, companies must know their ideal exit and desire for stability, not just at C-Suite
or management level, but at all employment levels. Such considerations will impact their
research process, such as investigating the number of funding rounds in which an investor
has taken part in their previous investee companies.

 

Choosing the right fit
Investors come in various shapes and sizes. Typical examples include:
• growth equity investors that take minority positions in the company and adopt a ‘hands-off’ approach;
• buyout investors that take a controlling stake from the outset and focus on increasing
value; and
• leveraged-buyout groups, who use higher ratios of debt to fund investments, meaning
sellers should seek as much cash upfront as possible.

 

When considering which of these options is most suitable, the following criteria is useful:

1. Name-brand vs. under-the-radar firms
Household investors have wide portfolios and extensive resources, but can also be
strict negotiators, while smaller firms offer flexible and target investment niches, but
lower valuations.

2. Hands-on vs. passive firms
Hands-on firms are more demanding and active decision-makers, whereas passive
firms often retain existing management and adopt a monitoring role.

3. Playbook vs. bespoke strategies
A playbook approach uses similar strategies for each portfolio company, sometimes
requiring them to move headquarters and replace their management team. A bespoke
approach creates custom strategies and will usually keep existing management, taking
a situational approach.

4. M&A vs. organic growth
An M&A strategy may involve replacing management teams and focusing on
accelerating growth, while organic growth means the existing management will be
kept, growth will be consistent, and advancement will be slower.

5. Firm fit vs. partner fit
Business leaders must ensure they meet a firm’s representatives, rather than choosing
on reputation alone.

Companies should also consider their proposed investor’s track record, rate of success,
culture and whether they freely offer references.

 

Attracting the right match
Once companies have decided on a target investor profile, it is good practice to formulate a
business plan that effectively communicates its goals, operational structures, capacity for
returns and, if applicable, an exit plan. Practical steps should also be taken, such as protecting
intellectual property, maintaining records and securing assets.

Finally, networking and joining investor groups is a valuable tool that should not be overlooked.

 

Get in Touch

For more information, please contact Ayman Shehata, Associate at CRS Law.

If you’re interested in further information on a share sale, get in touch with us here

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    Mike Minett, Former Client

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    David Stokes, Former Client

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    Jeff Weinstein, Former Client

    When I first engaged with Bluebox, I was hesitant as to the benefits of using an advisor to firstly, find a buyer for my business and secondly, to get a deal over the line. However, now that the deal has completed with KPM, I can honestly say that the finer negotiation points handled by Bluebox and their overall management of this process has been nothing short of first class. I would be delighted to recommend Bluebox’s services to any entrepreneur contemplating the sale of their business.

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    Henry Braham, Former Client

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