While the ‘equity is blood’ mentality is still strong in Irish business, increasingly Irish businesses are adding private equity investors to their share register. David O’Kelly, Head of M&A in KPMG, examines some of the drivers behind this trend together with the issues to consider.
Ireland continues to produce world class private businesses that are innovative and international from an early stage in their development. While there are many reasons why this country produces such great companies, one fact that cannot be denied is that both local and international private equity compete very strongly to invest in the best Irish companies.
Understand the drivers for private equity transactions
From a founder’s perspective, there are several drivers for private equity transactions. One significant recurring reason is to personally de-risk. When someone has created a business of value, it is common to get to a point where their personal priorities begin to mis-align with the needs of the business. The founder as an individual may want to provide for their family and ensure their own future is secure. These natural objectives can result in the business being run with conservative constraints to ensure that the value already created is not lost.
Other business founders want to grow their business either organically or through acquisition. While debt options are sometimes available, many shareholders wish to grow their business without the inherent risk of a highly leveraged capital structure.
Also when businesses are seeking to acquire companies, being part owned by private equity can signal ambition, access to capital and deal capability that might otherwise be difficult to convey.
Often the reason why companies investigate taking private equity investment is a combination of factors triggered by the transition of the business from a reliance on the founder towards a wider team effort. This transition is often a critical step for fast growing companies to reach their full potential.
Private equity implications
What exactly is private equity?
Private equity funds raise money from institutions such as pension funds to invest in alternative assets, including private companies. When these funds invest in businesses, their goal is to help develop the business to achieve an agreed objective such as a sale or IPO and thereby achieve a return on their investment.
PE funds usually make investments for a period of 3 to 7 years. At the end of the investment period the company is sold or participates in a new private equity deal / capital raise. The number of instances of one private equity fund selling to another is increasing and can be an opportunity to bring new skills to the table or to get investors with deeper pockets on board.
Ireland has a very active domestic private equity industry with a strong track record of successful investment. Ireland is also an attractive market for UK and US private equity so it’s worthwhile spending time building relationships with these PE funds to understand their deal appetite.
How private equity will impact your business
A common priority for private equity investors is to align the objectives of all key executives with the investor’s objectives. With private equity investment this typically takes the form of share participation that will result in the management team receiving some of the disposal proceeds if the objectives are met. A key benefit of this approach is that all the critical people in the business are focussed on the same outcome and adopt a similar mindset.
Most investors seek to have board level involvement but do not wish to directly manage the business – after all, the strength of the management team is usually one of the key investment considerations. As a result, the business will need to adapt to having external shareholders with an interest in the business. The changes range from the provision of appropriate information, changes to governance so that decision making is appropriate for the situation and an openness to the ideas of outsiders.
Private equity investors will be very focussed on the impact of any decisions on their own objectives, including an exit. Good investors will bring experience from other investments, sector insights and strategic thinking to help businesses reach their full potential.
One of the most important factors for success is the chemistry between the leadership team and the investor, so it’s essential to foster this relationship. There are a wide range of investors, so good companies that have told their story well will have options and should choose with their eyes open.
Readying the business for private equity
At KPMG, one of our jobs is to help tell the story. We do the work to translate the company’s vision into an investment thesis. We also validate a company’s assumptions so that the investor’s excitement about the opportunity is borne out through due diligence.
A transaction takes an enormous amount of work to prepare and execute. We strongly believe that it is critical there is a dedicated team to run the business and a dedicated deal team. While each deal is different and it depends on a company’s readiness, we typically work intensively with a business for two or three months before going to the market seeking investment.
Partnering with private equity is certainly not the answer for every family business. There are numerous examples of large successful Irish businesses that have taken alternative funding routes. As a market participant we are seeing an increasing number of private equity success stories where founders achieve their personal objectives and companies enjoy continued success.
Get expert advice
Find out how a private equity investment could boost your business while curtailing risk. Talk to our Private Equity team today.