Private Equity – Is It For You?

Private equity funding is not widely used in Ireland.  Despite the Irish economy being one of the fastest-growing in Europe, and despite the number of successful entrepreneurial companies and managers based here, there remains a limited number of traditional “buyout” deals in any one year – on average around 30 deals per year.  This means that company owners, managers and advisors are missing out.  Private equity can be a compelling source of funds for company owners, of wealth creation opportunity for managers, and repeat business for advisors.

‘Private Equity’ is sometimes misused as a catchall term for all manner of unquoted investments, from real estate to seed stage venture capital to so-called vulture funds. It’s important to understand what private equity actually is.  In essence, and simplifying a little, private equity is a type of investment whereby the relevant investor acquires a significant interest in, or control of, a company which is privately owned (ie. which is not traded on a stock exchange) – or a company which is currently stock exchange traded but where the private equity fund intends to “de-list” or “take private” the public company.

There are two types of private equity fund:

1. Growth Equity.  Growth Equity funds target established companies that are growing revenue at around 20-30% per annum (or better) and which are profitable or close to it.  They provide “money-in” to the company itself, usually to spend on growth-accelerating measures like additional sales headcount or acquisitions, and/or “money-out” to existing shareholders. Growth Equity funds typically take a large minority position and try to secure shareholder rights over and above their percentage ownership.  Growth equity investors value revenue growth above all.  They aim to invest in winners in exciting markets and sell to trade buyers after 3-4 years for a big return. 
2. Buyout.  Buyout funds target established, profitable, cash-generative companies with modest revenue growth, usually 10% or lower.  They provide “money-out” to existing shareholders and usually take a majority stake.  Buyout funds make money in the same way that buy-to-let investors make money. Cash flow from the company (equivalent to rent) is used to service the debt (equivalent to a mortgage) used in part to buy the company.  As a result, the company doesn’t have to grow dramatically for the investor to make good returns on their equity. 

There are many companies in Ireland that offer stable, predictable revenues and high levels of cash generation.  These companies are considered unexciting by venture capitalists or growth equity funds, and don’t usually make the news, but they are highly prized by buyout funds.  If you are an owner of such a business you might be surprised at how good a deal you could strike for yourself, your family and your staff.  Talk to an experienced lawyer who will help you protect your interests (key areas include: What happens if the company is underperforming? What happens if the fund wants to sell and you don’t, or vice-versa? What happens if you and the fund fall out of love with one another?), and a corporate finance advisor with plenty of buyout experience to help you present the business in the most favourable light for this type of investor, and then test the water.  It could be a better option for you than just taking your annual dividends or selling out to a larger company. 

Thanks to Alex King, specialist in venture capital and private equity, for providing this month's blog. Alex can be contacted by email at: alex.king@ldcapitalservices.com or through his LinkedIn profile: https://ie.linkedin.com/in/alex-king-50063997

The views expressed in the posts and comments of this blog do not necessarily reflect the views of the Institute of Directors in Ireland. They should be understood as the personal opinions of the author. The content of this blog is for information purposes only and the Institute of Directors in Ireland is not responsible for the accuracy of any of the information supplied.