Is private equity for you?

For many promising SMEs, partnering with a private equity firm might be their best shot at reaching their potential. So, what is private equity and what does it mean for your business?

Private equity has become a significant presence in the Australian corporate landscape over the past few years as some of Australia’s biggest and best-known companies, such as Qantas and Coles, have found themselves the targets, willingly or otherwise, of private equity funds.

While private equity interest in the larger corporations has captured the headlines, many SMEs have also benefited from partnering with private equity firms. A number of Australia’s entrepreneurs and family businesses have quickly realised that there is much to gain from partnering with the right private equity investor.

So what is private equity?
Private equity (PE) is investment typically in private or unlisted companies that are considered to have significant future potential. The investment is in the form of financial capital that is given in exchange for an influential equity stake in the business.

Private equity investments have the following important characteristics that set them apart from other forms of business ownership:

•    Alignment of interest between owners and management
Each has a genuine stake in the business and is firmly focused on increasing its value.
•    Medium-to-longterm perspective
Private equity investors typically hold their investment over a three-to-five-year period so therefore tend to be supportive of businesses that are investing for future growth.

Private equity investment is frequently categorised according to the stage of development of the investee company. The following categories are often used:

1.    Seed investment (start-up businesses);
2.    Early stage investment (early stage and pre-profit businesses);
3.    Expansion stage investment (proven profitable businesses requiring capital for step-change growth); and
4.    Buy-out investment (partial or full buy-out of existing shareholders).

Why could SMEs benefit from private equity investment?
There are a number of terrific SMEs that would have the potential to develop into much larger, more profitable businesses if they had greater access to financial capital and, as importantly, management talent to develop and implement a strategy to drive that growth. SME owners are often so caught up in the day-to-day running of their businesses that they don’t have the time or the expertise to develop the plan that could turn their business from a $20m business to a $50m business in three-to-five years. PE firms specialise in doing exactly this.

Working with a good PE partner can be incredibly satisfying and rewarding for the business owner, the management and the PE partner, as the combined team takes the business to a whole new level.

Having been an owner and CEO of a business that has benefited from private equity investment, I understand how beneficial it can be to bring in an equity partner. One of the benefits is that you have a co-owner who can really add value to the business as well as sharing in the risk. They’re not just another employee who gets their pay cheque irrespective of the performance, but someone who shares in the capital risk of the business.

Yarra Capital recently made an investment in the glass industry by merging three different businesses into one larger company to enable greater access to capital, technology and talent. Each of the owners of the three businesses found our proposal attractive because it helped solve the following business and personal issues:

•    Owners who were reaching retirement age and wanted to realise a financial gain today while still retaining a stake in the business;
•    Children of business owners that needed and wanted further development from new professional executives; and
•    The industry was increasingly becoming more sophisticated and competitive with greater levels of regulation and greater demands from customers and suppliers.
As a merged entity, the group will be better equipped to service this growing market and address the personal needs of these owners.

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