How Private Equity Can Accelerate the Growth of Your Business
As a Founder or a CEO are you wondering how to supercharge the growth of your business? Do you have clear plans on how to grow but not have enough fuel (capital) in the tank to make it happen? Have you considered the pros and cons of Private Equity as a source of “resource”?
I say “resource” because as a disciplined investor, Private Equity investors bring with them a lot more than just capital.
The Myth about Private Equity (PE) firms being Greedy and Malicious
Historically, Private Equity firms have suffered from negative perceptions, fueled in part by media reporting of the demise of companies like Dick Smith. These negative perceptions include PE firms over leveraging companies and are focused on short term profits where they strip and flip businesses with complete disregard to other stakeholders, which is quite contrary to what PE aspire to do – particularly in this part of the world.
It is true that PE firms are driven by returns, however, PE firms have a compelling reason to build “healthy” businesses, as when it comes to selling the business for a healthy profit, they need to be able to demonstrate to prospective buyers that they are selling a sustainable business.
Ways PE Accelerate Growth
PE investors provide the much-needed capital injection to fuel expansion plans, but equally valuable are the disciplines and the expertise they bring in the areas of strategic planning, financial management and governance.
They help management teams build ambitious growth plans and put in place adequate resource to ensure plans are executed successfully. They also put in place generous incentive plans for the management team linking rewards to the achievement of long-term goals.
Founder and family owned businesses can be prone to underdeveloped governance structures which can mean that they aren’t able to take full take advantage of all the opportunities available to them to grow the value of their business. On the other hand, PE understand the importance of good governance and will appoint on the board industry experts to help guide the business on the right trajectory.
PE firms successfully grow the value of their portfolio companies through revenue and margin expansion as well as via cost control. Revenue growth is generally driven by expansion in product lines and moving into fast growing market segments or by building and expanding into export markets. At the same time emphasis is placed on margin enhancement and cost control to drive productivity and efficiency of the operation which is managed via operational and profitability KPIs (Key Performance Indicators).
Is Private Equity Capital Right for You?
PE firms are generally very disciplined in building value in the businesses they invest in, and there are a number of examples of PE firms in New Zealand delivering significant growth and returns for founders. But before seeking out PE capital, it is important to clarify your goals and objectives for the business and for yourself. As a founder of a business are you looking to exit the business or stay involved, or are you looking to retain ownership within the family? As a CEO are you interested in undertaking a management buyout? How much capital does the business require and do you know the range between which your business may be valued at? Also, it’s good to know what makes your business attractive to PE and whether you need to get your business, investment ready, before approaching PE firms.
What are PE firms Looking for in a Business?
We have previously published a guide titled “How Successful Founders, CEOs and CFOs Fund Business Growth” where we discuss what Investors like PE are looking for in a Business before they invest. Click here to download this Guide.
The question for a lot of founders and family owned business is whether they are happy with the existing trajectory of their business or whether they prefer to accept dilution of shareholding and control in return for building a highly successful business with the potential of being worth much more upon exit?
Shakti Harduar is the founder of Paradigm5 Partners, a boutique advisory and investment company that helps NZ businesses to grow and build scale. They work with Private Equity firms in New Zealand and Australia and have experience in helping businesses raise growth and buyout capital through Private Equity Investors. Their services include strategic advisory, capital raising and getting businesses investor ready as well as helping businesses with geographical expansion. Paradigm5 Partners also helps owners build value in their businesses pre-exit or succession.