Private equity firms collate a pool of money and invest in underperforming businesses with a view to turning them around and exiting with a positive gain. Investors generally assume a managerial interest in the business as well to help shape the future direction.
Private equity in practice
There are four key principles in order to make a return:
- Raise money from private sources including pension funds and wealthy individuals
- Source and close deals to acquire failing companies
- Improve the operational running by cutting costs and tightening management
- Exit companies by selling at a profit
What do private equity investors look for?
Private equity firms do not have the reassurance of capital repayments with interest, instead they rely on selling their shares for more than they invested. They look for high-growth potential businesses with a strong chance of success, increasing their chances of capital gain.
Businesses with excellent market potential, led by a sound management team are a great start.
The role of private equity investors
They will take a very hands-on approach to being involved in the day-to-day running of your business, often making significant changes from the outset. They will provide financial, strategic and operational input as required in order to steer the business to an enviable position.
Private equity investors will typically look to exit the business between 3 and 7 years after the original investment took place.
Does my business meet the criteria?
Although private equity investors look for under-performing businesses, they must be able to demonstrate the potential to succeed. An investor will need to see:
- A proven management team with relevant sector experience
- Management with shared responsibility, not a single dependency
- A desirable market position, niche or brand
- A competitive offering with an identifiable USP
- A sound business strategy capable of achieving growth
Securing private equity investment in your business requires careful thought as there are strategic consequences to be aware of:
Pros
- A huge level of funding can be achieved
- Investors are actively involved to maximise the business’ value
- A return isn’t expected immediately, instead investments are long-term
- Private equity deals are known to deliver a high return
Cons
- You could lose the majority stake in your business
- Business changes are generally out of your control
- Investors are interested only in the financial value of the business
- The eligibility criteria is tight so many businesses are not considered