What private equity investors look for in a business
External funding can be a huge catalyst to growth, and private equity is one of the most business-friendly methods of obtaining a cash injection.
In addition to funding, private equity backing often comes paired with an experienced business head (or a full team of such) and all the expertise, contacts and influence that brings.
It’s funding, however, that is hard-earned, and organisations need to stand out from the crowd to be the chosen project of potential backers, who often have plenty of options to pick from.
Knowing what private equity backers look for in a business can significantly improve your chances, so here are some common themes among private equity backers.
Past successes are not always enough of a selling point for many private equity backers, as momentum is every bit as important. A business turning a profit but which is in decline is likely to take more effort and capital to achieve growth than another project making smaller sums but that can clearly be shown to be trending upwards.
Scalability and growth potential
Similar to momentum, it’s crucial to be able to prove there’s no ceiling in sight for your organisation’s growth. Even if figures are trending upwards, if the market is all but saturated, you’re working at peak capacity with no viable way to expand, or there are other barriers to ongoing growth, then there is little incentive for an investor to jump on board at this time.
The ideal project for a private equity backer is a business which has experienced growth but which can also prove there are many more stages of growth to come.
Investment houses and private equity backers don’t accumulate cash by being care-free with it. Their spending is based on calculated decisions and any investor will want to ensure that money put into your business is within their comfortable level of risk. That includes you not blowing their investment on champagne-fuelled plane rides and exuberant seven-figure desks (lessons learned from the dot-com bubble burst.)
A demonstration that your own cash has been spent wisely to date is a good indicator that you’ll be responsible with that of your investor. If you frittered away your own hard-earned money, what are the chances of you being sensible with someone else’s?
A mantra of many business owners is that a flawed plan executed well is more effective than a good plan carried out poorly. You may have the most novel idea on the market, but if your management team isn’t up to scratch then the chance of your organisation reaching its full potential is limited.
Industry experience, as well as past experience growing business, is an added bonus but aren’t always a hard-and-fast requirement. Such ingredients can be bought in, but a hard-working, harmonious board must be organic.
Not only must a team work well together, but it must appeal to a potential private equity investor, with whom you’ll be in regular contact, often sharing time in the boardroom.
There are ‘good’ boards and ‘bad’ boards, but sometimes it’s simply down to personal preference. Maybe your approach is too loud or quiet, too young or old, or too brash or subtle. Sometimes it’s not a case of right or wrong, and if it works for you and has caused success so far then it’s probably worth sticking with. The truth is, however, that it might simply not appeal to an individual investor.
Their own portfolio
Private equity backers often seek out specific kinds of projects. Each will have their own specific wish list, but commonly this includes a particular size of business, at a particular stage of growth, within a particular market sector.
Some investors choose only organisations within a very specific niche, others might prefer to diversify their portfolio. Either way, it’s crucial to understand what an investor is looking for before courting their finance and support.
Not only is it a waste of everybody’s time to pitch to a backer whose interests you don’t meet, but there is also much to be gained from securing the support of an investor with intimate knowledge of your industry and prior experience in achieving what you’re hoping to achieve.