Private Equity

Getting ready for private equity investment

Sante Maiolica Sante Maiolica

At a time when access to finance is proving critical to many, mid-market businesses are looking beyond traditional sources and turning to private equity to fund their growth. Our specialists explore how private equity firms are now working with their portfolios and how the mid-market can benefit from investment.

As global markets grapple with the impacts of COVID-19 and face an extended period of uncertainty, mid-market businesses have growing concerns about their ability to raise finance to invest in growth. As a result, leaders are increasingly looking to alternative finance like private equity (PE) to achieve their strategic ambitions.

“Over the years, Private Equity (PE) has proved to be capable of profitably investing in Italian mid-market companies, supporting their internationalization, managerialization, combination and consolidation.

In a period characterized by unprecedented economic and social challenges, which forced businesses to review their financial and strategic targets, Private Equity can more than ever play a key role in the support and development of economic activities and represent a valid finance alternative.

Although the industry is still suffering the pressure of the so-called “Covid phenomenon”, which is reflecting on slow-downs in terms of both market scouting and negotiation, the considerable liquidity of funds and highly competitive interest rates lead companies to constantly look for new investment opportunities.

Grant Thornton Financial Advisory Services can assist both Private Equity operators in evaluating the opportunities available in the market, and companies interested in Private Equity investors in defining the most efficient strategy and finding the most suitable partner based on their specific needs.

Together with our Grant Thornton colleagues, we examined the role and the operation of Private Equity in detail, providing insights and suggestions to those companies that are interested in this finance option.” Says Sante Maiolica, partner and CEO of Grant Thornton Financial Advisory Services.

PE investment has long been seen as a potential source of capital for the mid-market. Indeed, for many firms, finding the right PE partner – aligned to their goals – has acted as a growth catalyst and helped the firm to its next stage. That trend may continue. The latest Global Business Pulse following the first wave of COVID-19 lockdowns, showed that 46% of global business leaders viewed a shortage of finance as a constraint on growth – a jump from 37% in the previous half.

Figures from H1 2019 also showed there was a considerable appetite for private equity investment in the mid-market with 37% of businesses looking at PE to fund international growth. When it came to M&A, 36% were thinking of PE while 29% of businesses aiming for organic growth expect to support their strategy via PE investment.

However, although mid-market leaders are increasingly amenable to exploring PE investment, many remain reticent about partnering with PE finance, put off by some of the less frequent examples of negative outcomes. As a result, some mistaken notions have grown around the industry (see our private equity myth-busting article for some common misapprehensions). Fully understanding the benefits of PE, how they operate, and how your business can prepare for equity investment will be critical to devising your finance strategy.

Private equity offers funds, expertise and experience

As businesses review their strategies and where they need to make investments for growth in the wake of COVID-19, private equity is becoming a more interesting finance option.

PE investors are proactively searching for the right businesses either to buy outright – in the case of succession and the owner exiting – or to transform the growth prospects of those assets through investing in organic and buy and build strategies. Many owners are drawn to PE because of the expertise an investment partner can bring as part of the transaction. With leaders keen to get ahead of competitors, and attract new customers and suppliers, they are forced to look further afield.

Private equity is evolving to meet the needs of its assets

PE still makes some business leaders nervous – losing control of the business is a significant psychological barrier. And while businesses that seek PE investment for growth can retain control by relinquishing a minority stake – concerns about tension between management and investors still exist.

Following the financial crash, the PE sector has rebuilt its reputation away from the perceptions of buccaneering and asset-stripping. Firstly, operating talent has come to the fore. More firms have put considerable effort into creating teams of operating professionals that can advise and support their investments better.

That bank of talent is increasingly being used to attract companies looking for finance, as well as practical hands-on experience to ensure firms can drive the best performance from their investments. Secondly, many firms have introduced environmental, social and governance (ESG) factors into their portfolio companies, due diligence and operating plans as they look to create benefits beyond financial returns, which ultimately point to more sustainable growth. As a result, the length of investments is expanding.

The scope of PE's interest remains broad. Despite some misconceptions, PE is not mainly focused on cutting edge technology or distressed assets.

Successful PE investment follows rigorous preparation

While PE firms have a lot of liquidity and eagerly hunt promising assets among the mid-market, the criteria for investment is high. There are plenty of things a successful mid-market business can do to attract PE interest and increase the chances of following through with the right deal.

1. Be clear PE is right for you and get internal buy in

The first step is clarity. Are the owners and business leaders clear that private equity investment is the right route forward for growth and have the key stakeholders got buy-in? Negotiations and due diligence can be more straightforward if private equity has already been properly considered as part of the growth strategy.

2. Ensure you have the right financial information available

Indeed, the due diligence process can be onerous and time-consuming. Investors want to know what the business operations and accounting look like and what kind of reports can be produced. Businesses sometimes lack the capacity to produce the volume of analysis and information that PE firms are looking for, so when a process starts the businesses management team, finance, accounting and reporting function can be overwhelmed.

3. Have the right management in place

The CEO normally drives the top line, growing the business whether by products or by country. PE firms will also take a close look at the CFO and will want to know they have the numbers ready and understand them.

4. Seek support from trusted external advisers

Critically, outside of the management, businesses also need the right external support, including lawyers and investment bankers to help assess the merits of any potential PE partner and subsequent deal. Today, there is much more opportunity to make that assessment. PE firms are competing for assets and are more focused on building relationships and trust with potential partners, understanding what the target business is looking to achieve and establishing whether they can make an appropriate return through supporting them.

Preparation is key

PE is certainly one avenue to consider as businesses pivot to grasp opportunities and adapt to the new world of COVID-19 and its impact. But ultimately, mid-market businesses need to be sure of the strategic path PE presents and have a full game plan to ready themselves for that investment.

They make their returns through asset stripping

PE's reputation is better than it was, and while firms with majority stakes have the power to asset strip, it is not usually their aim, and those types of scenarios are the exception and not the norm.

Investors focused on growth businesses are looking to increase the value of that business so they can sell their equity at a much higher price than that at which they bought it. This is achieved in many ways through financing a growth strategy, such as new products, new territories, acquiring new businesses and transformative technology