Private Equity & SME Growth

The Right One

So, how does a business owner find the right private equity partner?

Given the importance of fit, there is no substitute for spending time with your potential private equity partner. This is a more important decision than choosing a service provider–the business is choosing a partner that will be very influential over future outcomes.

All stakeholders, including management, vendors and financiers, need to have confidence in the private equity firm to deliver on expectations. Criterion for choosing appropriate firms often include:

• credibility, integrity and ability to maintain confidentiality

• ability to structure and fund the transaction

• transparent and speedy investment approval process

• complementary fit with management including ability for the private equity firm to add strategic and financial value to the business.

Understanding the investment criteria of each private equity firm can make this matchmaking exercise more efficient. Credible firms generally make their market focus reasonably clear on websites and other publicly available information. For example, a firm such as Anacacia Capital can’t invest in start-ups. Other firms focus their efforts only on start-ups or early stage ventures.

When should a vendor consider approaching a private equity firm?

MBOs usually result from succession issues within private companies or from parent companies wishing to divest non-core assets. Engaging an adviser to run a sales process involves inviting several trade buyers and financial investors to tender their interest. While such competitive tension can maximise the likely price, it may also risk sensitive information falling into competitors’ hands. If not run correctly, this may tarnish the business, particularly in the case of an aborted sale.

Alternatively, vendors may enable a private equity firm, either with existing or new management, to have a preliminary look at the business. If they can meet the vendor’s price expectations, then they can enter into exclusive arrangements to complete more detailed due diligence and documentation.

There are several advantages of a vendor approaching a private equity firm in the first instance, particularly where the following factors are important:

• management may understand the potential business value better than other parties and will require less due diligence

• the confidential process minimises the chance of damaging information leaks

• there is flexibility to move later to an auction sales process if private equity doesn’t proceed

• they wish to reward loyal staff (particularly common in private businesses)

• MBOs can often be more acceptable to other stakeholders, including competition regulators, the broader workforce, customers and suppliers.

While there are distinctions between private equity firms, there are probably more similarities. The basic investment criterion of backing proven management teams in businesses with strong potential is a repetitive theme. Similarly, companies will generally be well advised to seek private equity partners that are willing to pay a ‘fair’ price and have the reputation and potential to help their businesses grow into the future. However, despite all the best quantitative analysis (and good private equity firms do a lot of this!), the end decisions often come down to personality fits and qualitative judgments about people’s honesty and capabilities.

 * Jeremy A. Samuel is managing director of Anacacia Capital and chairman of its investment committee. Anacacia Capital invests alongside proven management teams in established small-medium enterprises. This article is an introduction to a complex, dynamic area and is not intended to be a substitute for independent advice or to represent the views, opinions or advice of the author or his employer.