Is Private Equity an option for my company?

"Private equity can be a game-changer for founders who are ready to scale their businesses without stepping aside. It provides the capital, expertise, and strategic connections to unlock new growth opportunities while allowing founders to stay at the helm."

In our last article, we explored the options available to a founder or shareholders seeking to exit their business. This article we explore one of those options available, recapitalisation of the business using private equity.

For founders who have built a successful business but are not ready to exit completely, selling a portion of the business to a private equity (PE) partner can be a transformative decision. If the business heavily depends on the founder's leadership for maintaining or growing revenue and profit, retaining an active role while partnering with PE can align short-term stability with long-term growth potential. This arrangement ensures that the founder's vision remains central while benefiting from the operational and financial expertise of a seasoned investor.

The Private Equity Market Is Growing

The private equity industry has experienced explosive growth over the past 20 years. According to Bain & Company’s Global Private Equity Report 2023, global PE assets under management surpassed $6 trillion in 2022, a significant increase from $1 trillion in 2002. This growth reflects the increasing recognition of PE as a critical driver of corporate growth and market innovation.

PE firms have diversified their investment strategies, expanding into new sectors such as technology, healthcare, and renewable energy, while also focusing on middle-market businesses. This evolution has created an environment where founders of businesses of varying sizes and industries can find a PE partner tailored to their specific needs. The rise of specialized funds—targeting areas like sustainable investments or tech-driven businesses—has further broadened the accessibility of PE capital.

Why Private Equity?

Private equity brings more than just financial resources to the table. It offers a suite of strategic and operational advantages that can propel a business to new heights.

1. Access to Expertise and Enabling Functions
   One of the first contributions a PE partner can make is professionalizing the company's operations. For example, PE firms often assist in hiring a Chief Financial Officer (CFO) and building robust financial systems. A skilled CFO can bring financial discipline, improve forecasting accuracy, and prepare the company for future liquidity events. Beyond finance, PE funds often strengthen HR, IT, and supply chain functions, creating a scalable infrastructure that supports sustainable growth.

2. Strategic Board Appointments
   PE firms excel in selecting board members and chairs with industry-specific experience and networks. These leaders can provide invaluable insights into market trends, customer behavior, and competitive strategy. Moreover, board members with strong industry connections can open doors to new revenue streams, whether by identifying untapped markets or fostering partnerships with other businesses in the PE firm's portfolio.

3. Accelerated Growth and Market Expansion
   With the infusion of PE capital, businesses can pursue growth strategies that were previously out of reach. This might include expanding into new geographic markets, launching new product lines, or acquiring complementary businesses. Additionally, PE firms typically have a vested interest in maximizing a company’s growth trajectory, aligning their goals closely with those of the founder.

4. Focus on Long-Term Value Creation
   PE partners bring a disciplined, metrics-driven approach to decision-making. By focusing on key performance indicators (KPIs) and implementing best practices across all functions, they help the business achieve consistent, measurable progress.

Is My Company Attractive to Private Equity?

To attract private equity investment, a company must meet certain criteria that signal its potential for growth and profitability. Founders should evaluate their business against these benchmarks:

• Demonstrated Revenue Growth and Profitability: A track record of revenue growth and consistent profitability is a critical factor. While some PE firms specialize in turnarounds, most look for businesses with solid fundamentals as they are not involved in the business day to day.

• Scalability: A business model that can scale effectively with additional capital is a key requirement. This includes having systems and processes that can support increased operational complexity, or can act as a platform for future acquisitions (called “bolt-ons).

• Market Potential: The business should operate in a market with significant addressable market, growth opportunities or possess a competitive advantage that allows it to capture market share. These two aspects - addressable market and competitive moat - are key elements in a company’s attractiveness.

• Strong Leadership: PE firms value experienced, capable management teams. Founders who demonstrate a clear vision and the ability to execute are particularly attractive to investors. Make no mistake, in almost all cases PE firms are investing in the founder, what they have built and their confidence in the vision.

• Data Transparency: Comprehensive, well-organized financial records and operational data are non-negotiable. These provide PE firms with the insights they need to assess risk and develop growth strategies. While all processes seek to present the company in the best possible light, transparency is key. Risks must be understood to be overcome.

One of the most compelling aspects of partnering with private equity is the opportunity for founders to achieve two financial windfalls. The first payday occurs when the PE firm buys a stake in the business, allowing the founder to monetize part of their ownership while retaining significant equity. This capital can be reinvested into the business or used for personal wealth diversification. These are termed primary and secondary capital, respectively.

The second payday comes during the liquidity event, such as a sale, merger, or initial public offering (IPO). By the time this event occurs, the business has likely grown substantially in value due to the combined efforts of the founder and the PE partner. Founders who retain equity through this phase often reap substantial rewards, capturing the upside of the value created during the partnership.

Thinking about it?

Private equity can be a powerful ally for founders who want to scale their businesses while maintaining a leadership role. By bringing financial resources, operational expertise, and strategic guidance, PE firms help businesses unlock their full potential. For founders, the ability to secure two paydays while driving the growth of their vision is a compelling incentive to explore this path.

As the private equity market continues to grow, founders now have more opportunities than ever to find a partner whose goals align with theirs. By preparing their businesses to meet the criteria of PE investors, founders can position themselves to take advantage of this transformative opportunity and propel their companies into a new era of growth.

Keen to understand more about accessing PE investment? Message us for more details or to arrange a meeting.