Ask the Expert with Lee Humble – Is Private Equity the next step?

Lee Humble, our Corporate Finance Associate Partner, asks whether private equity investment could be a realistic possibility for businesses in the current economic climate.

Current market conditions and lockdown measures have seen major disruption to business trading, with cashflow becoming a major concern for business owners and managers across all sectors of the UK and global economy.

The saviour plan introduced by Government has seen the introduction of the largest fiscal push ever recorded, with schemes such as employee furlough, government grants and government supported loans being offered to qualifying businesses.

As we enter a period of eased lockdown measures the question now moves to what businesses should do next – and how can businesses further boost cashflow after a period which has seen reserves deplete and working capital contract. 

Private equity may become an increasingly attractive option in the medium term, with banks and other debt-based funders becoming nervous and perhaps unwilling to advance further capital as the serviceability conundrum becomes ever more challenging.

The PE market, as we entered 2020, held record levels of dry powder and in the wake of Covid-19 some global players have continued to raise funds. Recent months have seen a natural deceleration in new investments as these PE Houses focused on their portfolios and allocated capital to support them during a period of much reduced trading.

We are now entering a period where this dry powder will pivot again back to new opportunities – with bolt on opportunities for existing investees likely to be a continued objective alongside investment into new businesses.

PE tend to favour technology based and technology enabled sectors, with statistics published in April showing an inclination towards FinTech, AI, block chain and new sectors such as Prop Tech. Whilst a lot of equity providers are broadly sector agnostic, technology based propositions are seen as attractive due to the global movement towards automation and connectivity, as well as the contractual and recurring nature of revenues streams in these businesses (i.e. they are often less seasonal, show more stable cash trends, and can demonstrate long customer relationship profiles). Therefore, such businesses often command premium valuations.

Whether you are in these sectors or not, a PE investment could be an attractive means to capitalise your business and stimulate growth, with these investors bringing capital and expertise to the table. It is very common for such transactions to include the appointment of senior board level positions and chairpersons who bring sector experience, elevated profile, and their own contacts into the business.

For all the benefits however, other certain aspects must also be considered : who is the investor, how does their track record suggest they perform and behave, what are their timescales for an ultimate exit, how active will they be, what default provisions exist in the event of the business failing to hit ‘plan.’

On this basis, it is essential that you are well advised and that you enter negotiations with a thorough and robust plan which can be articulated to the investors and then, crucially, delivered. As part of this you will need to outline why you are seeking PE investment: with most equity players favouring buy-outs and growth capital proposals.’ Some investors can also support an investment whereby profitable and long-standing businesses are looking to recapitalise and provide a cash payment to existing shareholders.

PE may also not be an immediate possibility for a large portion of SMEs, with most PE managers seeking minimum investment rounds of £2m. It is also essential to recognise the profile and structure of a PE investment may not necessarily take the form of pure equity – with debt structures often a feature.

Whilst there is a common perception of inflated valuations in PE investments there is a lot to consider and the value of an experienced advisor cannot be underplayed.

Contact Lee

Lee has 15 years of professional services, banking sector and Corporate Finance experience, having spent time in London and the North West.

For further advice, please call 0191 285 0321 or email lee.humble@taitwalker.co.uk