What are private equity funders looking for?

The appetite of private equity funders to invest in North West businesses shows no sign of abating. Jack Stephenson, solicitor from the corporate team at Harrison Drury, explores what private equity funds are looking for and offers some tips for SMEs looking to secure investment.

Private equity activity has seen healthy growth in the North West over recent years, and I see no reason why this trend shouldn’t continue in 2017.

Manchester in particular has a cluster of private equity funds based there, providing good access to investment opportunities for entrepreneurial businesses across the North West.

It seems that even following the uncertainty created by the Brexit vote, private equity has remained active in the latter half of 2016.

I expect PE funds and firms to continue investing in established regional businesses, especially those that are more insulated from the potential impact of Brexit, and with strong, predictable financial performance and growth potential. 2017 could therefore represent an attractive window of exit for some business owners.

One trend that has emerged is that whereas in London the private equity market is now dominated by deals with bigger companies, in the North West, private equity groups are more likely to invest in companies that are still run by their founders.

Some tips for owner-managers and SMEs wanting to access private equity:

1. Do your research: As a starting point, do some preliminary investigation of potential PE investors. Do they understand your market? Have they made similar investments and successfully added value to similar businesses in the past?
2. Demonstrate the value in your business: It’s important to remember that private equity investors are financial investors, and their decisions are based solely upon their projected return on investment. They will want to acquire the target business on the right terms (and crucially, at a price which will allow it to achieve its target returns).
3. Be clear about what you want: It is advisable to have a both a good indication of the value of your business, and someone to represent your interests and negotiate on your behalf, before embarking upon any potential deal.
4. Build a strong management team: Business owners looking for PE investment for a partial buyout should be aware that a deal may involve relinquishing control. PE investors will usually want to work alongside a properly incentivised management team to develop and improve the operations and financial performance of the business. While they may be sensitive to a business founder’s wishes, their primary concern is ultimately to provide a return to their fund’s investors.

Contact Harrison Drury’s corporate team on 01772 258321.