How Entrepreneurs Can Navigate Partnership with Private Equity Investors
The prospect of a private equity firm buying into your business can be exhilarating for an entrepreneur. Here's how to avoid the pitfalls and make it work.
The prospect of a private equity (PE) firm buying into your business can be exhilarating for an entrepreneur. At the same time, it means an outsider is coming in to your firm and will expect to have a say in how you run it.
So it’s vital to pay attention to some key dos and don’ts when contemplating partnership with a PE investor.
1. Understand the economics of PE investors
One of your first tasks when dealing with PE is to educate yourself on the economics of the industry and the approach of the firm that is talking to you.
There are more than 3,000 PE firms looking for opportunities in Asia. All of them plan on increasing the value of their investment, but there are different ways they can do that.
Some will want to expand your company’s market share quickly through organic growth or acquisitions, while others will want to spin off the less efficient parts of your company and concentrate on extracting more value from the most profitable operations. Some will want to be hands-on in management; others will be more remote.
2. Know how your deal fits into the PE firm’s strategic plans
Once you understand the workings of private equity and how your potential partner is likely to proceed, it is also worth looking at the other companies in the portfolio of the PE firm that you will be joining.
While it is tempting to think you are the apple of your new owner’s eye, they will typically have a range of companies under their umbrella and will be looking for synergies between them. Understanding your place in that family could be key to figuring out your investor’s intentions and how they are able to create value for your business.
3. Find a PE firm with the right sector expertise
Delving into the strategic outlook of the PE firm and taking an interest in its wider portfolio will give you a good sense of how well they understand your industry.
If they have stakes in companies within your sector or have experience in making and exiting investments in companies like yours, the likelihood is they will be able to add value to your business too. You should naturally be cautious about PE firms with little or no experience in your industry.
4. Evaluate PE investors thoroughly
It would also be wise to extend your due diligence further and try to talk to people at firms that have had previous experience with your suitor. Find out if former portfolio companies were happy with how they were treated, and with the eventual outcomes.
It is also important to know what kind of people you will be dealing with directly. It is likely any PE firm will dedicate a small team to manage its day-to-day relationship with you.
Make sure you know who the individual members of that team will be and whether they are the type of people you will find it easy to work alongside. You also need to understand how these individuals will be compensated for the performance of your company, as that will inevitably shape the approach they take to the relationship.
1. Neglect your advisors
Capable advisors may not be cheap, but good counsel is worth its weight in gold in the long run, potentially saving you far more than you spend early on. The PE firm will have its own experts so make sure you have a team of bankers, lawyers and consultants equal to them in your corner.
2. Forget to dot the Is and cross the Ts
Once you have the best possible advisors in place, you can be confident that they will ensure the documentation is watertight – but you should also take a close interest in this. Getting the deal done quickly and efficiently is important, but making sure the small print is in order will mean you sleep more easily after that.
3. Skip the discussion on future funding needs
It is also crucial not to forget about your future financing requirements. While you may be pleased about the initial injection of funds into your company, you may need more as the business grows over the longer term. Is your PE partner willing to commit to certain funding needs or do they want to turn the tap off once the initial investment has been made?
4. Forget that your PE partner has a finite timeframe for their investment
Your investor is managing funds with a finite legal life which is typically 7-10 years. So it’s vital to understand your suitor’s intended exit plan and the likely timetable for that to avoid future conflicts down the road.
Understanding when and how the PE investor plans to exit will allow you to get the most out of a relationship that has a clear end point in sight.
5. Risk a clash of values
Many companies today have a sense of purpose that goes beyond profit maximisation and build various environmental, social and governance priorities into their business model. If these factors are fundamentally important to your company, you should make sure that the PE firm shares some degree of your commitment to them.
Global PE firms have a record US$388 billion of funds available to invest in Asia , which can make them a valuable source of capital – not to mention operating expertise – in a more uncertain environment.
For some entrepreneurs, they can be the perfect partner to take your business to the next level. As with any partnership though, both sides need to understand each other before moving ahead.
Read more on PE Funds Wealth Side Stories #3: Private Equity