PRACTICAL GUIDE TO PRIVATE EQUITY
This guide to private equity (PE) is based on Michael Tait’s 25 years of working with private equity investors as CEO, Chairman or Executive Chairman.
The RESOURCE CENTRE, provides an outline of Private Equity, a valuable list of corporate finance advisers, followed by a list of featured lawyers that have experience of working with this form of investment.
See 142 very valuable articles written by Michael Tait about PE, developing businesses, business leadership and governance, and achieving exits for investors. See them all here: BLOG ARTICLES
What is Private Equity?
How do you secure this type of investment?
HOW TO WRITE A WINNING BUSINESS PLAN
What’s it like having PE investors?
HOW TO SURVIVE DIFFICULT BUSINESS REVIEWS
How should you work with them?
How can you keep investors onside during difficult times?
MANAGING YOUR PRIVATE EQUITY INVESTORS
What are the risks of taking PE investment?
RISKS OF TAKING PRIVATE-EQUITY INVESTMENT
Who is this chairman the PE investors have brought in?
Importance of private equity
Private equity has emerged as a crucial element in the financial landscape, offering distinctive investment opportunities for individuals, institutions, and businesses. In the United Kingdom, the PE sector has undergone significant growth, playing a pivotal role in propelling economic development, and fostering innovation. This guide endeavours to provide a comprehensive overview of PE in the UK, encompassing key concepts, processes, and considerations for both investors and businesses seeking investment.
Private equity entails investing in privately held companies with the objective of attaining substantial returns over the long term. Furthermore, firms in the UK actively manage PE funds by mobilising capital from investors, including pension funds, endowments, and high-net-worth individuals.
Subsequently, these funds acquire or invest in private companies, aiming to enhance their performance and, ultimately, sell them for a profit.
HOW DOES A PRIVATE EQUITY FIRM SELECT AN INVESTMENT?
Private Equity – Types
Venture Capital: focuses on early-stage companies, typically in the technology and innovation sectors. These tend to be the boutique investment firms where there can keep a close eye on investee companies. They excel in assisting embryonic companies in their development.
VENTURE CAPITAL – FUNDING FOR EARLY STAGE BUSINESSES
Growth Capital: PE companies don’t invest in startups or even, early-stage companies. They typically look for established companies with EBITDA of £2m, and often, a lot more. They look to invest in established companies looking to expand operations, enter new markets, or undertake strategic initiatives. Typically, this will be with growing and profitable businesses with EBITDA of £4m upwards. The larger private equity firms mostly prefer very large investments. These often involve hundreds of millions of pounds.
Mezzanine Financing provides a combination of debt and equity to investee companies, often during a buyout, with a focus on higher-risk, higher-reward investments. Mezzanine lenders sit between the lending bank and the private equity investor.
SELECTING AND TOPPING UP INVESTMENT WITH MEZZANINE FINANCE
The Practical Guide to Private Equity – Lifecycle
Fundraising: Private equity firms raise capital from investors through the creation of funds. Their source of funds can be from pension funds or a pool of high-net-worth individuals. Typically, firms raise these funds for a specific purpose, such as investing in technology companies or the biotech sector.
Deal Sourcing: This is where PE firms build a ‘deal flow’ through introductions to investment opportunities by a corporate finance advisor. It is almost always the case that investments originated out of an introduction from an advisor. There is a good reason for this. PE firms prefer advisors to handle most of the legwork on new deal presentations, as they are busy individuals.
The advisors are extremely good at this. It is an efficient system.
HOW DOES A PRIVATE EQUITY FIRM SELECT AN INVESTMENT?
Due Diligence: This is the conducting of comprehensive assessments of target companies to evaluate their financial health, management team, and growth potential. Due diligence is a major piece of work and very expensive. PE firms engage on this stage, only when they have gained exclusivity on the potential deal for an agreed price.
YOUR M&A ADVISOR IS YOUR CLOSE PARTNER IN A SALE OR WHEN RAISING CAPITAL
Investment: After completing preliminary assessments and due diligence, and once advisors on both sides have agreed on investment terms, lawyers take charge of finalising contractual details and completing the transaction. Ultimately, a significant number of contracts will cover a large board table in one of the lawyer’s offices. There can be hundreds of them. There will almost certainly be the PE house working in conjunction with an investment bank such as RBS or Investec who all have their lawyers present. Reaching an investment is a very involved and expensive process.
THE PRIVATE EQUITY INVESTMENT PROCESS
Building the business: This is a major subject in it’s own right. There are many articles on this site that discuss the development, leadership and governance of private equity backed businesses. Here are some links to important aspects.
THE 10 QUALITIES OF AN INSPIRATIONAL LEADER
ULTIMATE GUIDE TO BEING A TRANSFORMATIVE CHAIRMAN
THE ROLE OF THE CEO OR EXECUTIVE CHAIRMAN IN SALES
Exit: This is where you have done your job and built value in the business, and you are realising this value to reward the investors. Michael Tait has achieved numerous successful exits and offers some articles on the exit process.
ACHIEVING SUCCESSFUL EXITS FOR SHAREHOLDERS
THE ALL IMPORTANT SALE PROSPECTUS TO SUPPORT A SUCCESSFUL EXIT
WAYS OF VALUING COMPANIES
Risks and Rewards: Risks: Private equity investments come with inherent risks, including market fluctuations, economic downturns, and company-specific challenges. These risks must be well managed in order to avoid business difficulties and the distruction of your relatrionship with investors. Rewards: Successful private equity investments can generate substantial returns for investors, often exceeding those from traditional asset classes.
Regulatory Environment: The UK regulatory framework for private equity is primarily governed by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). Investors and firms must adhere to these regulations to ensure transparency and protect stakeholders’ interests.
THE FINANCIAL CONDUCT AUTHORITY
THE BANK OF ENGLAND PRUDENTIAL REGULATION AUTHORITY
Private equity in the UK presents a dynamic and rewarding investment landscape for those willing to navigate its complexities and dangers. Understanding the various types of private equity, the investment lifecycle, key players, and associated risks and rewards is crucial for making informed decisions. Whether you are an investor seeking returns or a business looking for growth capital, the UK’s private equity market offers abundant opportunities for those willing to engage in this dynamic sector.
You can find out more about the British venture capital and private equity industry on the BVCA website
For a list of featured private equity firms go to RECOMMENDED PRIVATE EQUITY FIRMS
For directory of featured corporate finance advisers go to LIST OF CORPORATE FINANCE ADVISORS
For a directory of featured law firms go to FEATURED LAW FIRMS FOR PRIVATE EQUITY