Fact Sheet - Raising Private Equity

Why raise Private Equity?

Around 1,300 companies receive Private Equity funding each year with £6.8Bn being invested in 2005 alone. In addition, a recent BVCA survey indicated that over the five years to 2005/6, on average private equity-backed companies’ sales rose by 9% p.a., compared with FTSE 100 companies (7% p.a.) and FTSE Mid-250 companies (5% p.a.).  In the same report PE companies Exports grew by 6% p.a., compared with a national growth rate of just 2% and investment rose by 18% p.a., compared with 1% nationally.

As a successful business owner, you may consider raising Private Equity to expand your scale of operation, to buy another business or to realise part of your business value. As an experienced management team, you may be seeking Private Equity to fund a Management Buy Out (MBO) or a Management Buy In (MBI). In each case you will be confident of your business strategy which will deliver significant benefits to all shareholders but probably be outside the conventional lending criteria of the high street banks.

What is a Private Equity fund looking for?

Private Equity fund managers are looking to back successful businesses with a Management Team they believe in, a business model they can understand, operating in an attractive market sector and critically offering good growth prospects. The Private Equity fund will seek substantial capital growth on their investment over a typical investment period of between 3 and 5 years. The Private Equity fund may also seek an annual management or non-exec director fee.

What are the likely exits available to the Private Equity (PE) funds?

Any owner or management team seeking Private Equity must always consider how the fund will achieve its own exit from the investment, and in the current market this is likely to be a significant factor in the initial investment decision by the PE. The management team should carefully consider all potential exit routes, ranging from a trade sale through to a public floatation, and in any presentation to PEs will need to demonstrate that all these options have been carefully considered.

What is the PE investment process?

The PE investment process usually takes between 3 and 6 months and typically involves the following stages:

• Preparation - presentation and financial business plan
• Roadshow presentations to potential PE backers
• Shortlist of Private Equity funds
• Negotiation of Heads of Terms agreement - for investment contract including Valuation
• Professional advisor scrutiny (due diligence)
• Completion of investment contract
• Receipt of funds

How do you choose the right PE funder?

The choice of a PE funding partner is not just about receiving a cash injection into the business. The PE provider will typically require Board representation and specific rights in certain given scenarios to protect their position. The PE will look to be involved in all strategic decisions as well as inputting to the annual business plan and to receive the monthly management accounts and information. The PE will become very 'hands on' if the business does not achieve its forecasts, and where problems do arise the personal chemistry between the business owner and PE fund manager will be critical. There are 162 Private Equity funds listed by the British Venture Capital Association, each with their own investment criteria in respect of market sector, funding stage, investment size and geographical location. Even private equity firms which may appear to be suitable may not have funds available. Each PE fund will typically receive about 40 funding applications a week and complete between 3 and 6 investments each year, making the chance of success as low as 1 in 700. These odds will be significantly shortened by careful preparation and by using the experience and extensive PE contacts of vfdnet.

How does a PE value a business?

Each PE will have their own valuation technique, however it is likely that the initial investment value will be driven by the projected capital return on their investment. The PE will arrive at its own view of the likely increase in value of the business, based on their scrutiny of the strategy and the financial business plan (3 - 5 years out), involving best, worst and middle case scenarios. The better the presentation to the PE the more likely that the PE will put a higher valuation on the business. Contact vfdnet to discuss.

What are the typical costs involved and how can these be controlled?

The costs of the PE investment include the professional advisors (Lawyer and Accountants) reviewing the business, as well as Legal fees for both the PE funder and the Company and the PE arrangement fee. Total costs are therefore between 6% and 10% for a £2m plus investment, with these being incurred from the due diligence stage onwards. The risk of these costs will normally be born by the Company, hence it is critical that there is a 'meeting of minds' and comprehensive Heads of Agreement. Clearly the risk of substantial abortive costs can be minimised by the use of an experienced Finance Director such as provided by vfdnet. In addition the investment costs can be managed by the informed control of the due diligence scope and interaction between professional advisors. Anecdotal evidence suggests that "The lack of an experienced Finance Director will halve the chance of doing a deal, and even if the deal comes off the costs and time frame are likely to double."

How can the risk of an 11th hour deal breaker be avoided?

The risks of last minute problems in the investment process need to be reduced as much as possible through careful preparation prior to opening discussions with a potential PE backer. vfdnet is experienced in understanding the typical requirements of PE providers, enabling the business to present its strengths and weaknesses at an early stage, hence helping to avoid unpleasant last minute surprises. In addition, the business must ensure that throughout the investment period (3 to 6 months) that it continues to meet or exceed its performance targets or forecasts. This is best achieved by the investment process being project managed by vfdnet allowing the business owner or manager to focus on driving and developing the business.

Disclaimer

This factsheet has been prepared by vfdnet based on extensive experience. However, every deal is different and no reliance should be placed on this advice. vfdnet does not accept any liability to readers of this factsheet. Owners or management teams wishing to attract Private Equity must seek professional advice such as that offered by vfdnet Ltd.

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vfdnet have many years experience of helping early stage and growth companies, hence we work efficiently and provide you with a cost effective solution. Contact us for a no obligation discussion about your needs.