Preface

Private equity for growth and success

Private equity for growth and success Private equity investment has been demonstrated to contribute significantly to companies’ growth. Private equity backed companies outperform leading UK businesses.

The annual “Economic Impact of Private Equity in the UK” shows that the vast majority of companies receiving private equity believe that without private equity they would not exist at all or would have developed less rapidly. Furthermore the report consistently demonstrates that private equity-backed companies increase their sales, exports, investments and people employed at a considerably higher rate that the national average.

While the growth and success of these companies owes much to private equity investment, enabling them to achieve their full potential, the non-financial input by the private equity firm is also a very important contributor. The private equity firm’s involvement generally does not end following the initial investment. Of the private equity backed companies analysed in this survey, annually over three-quarters say that their private equity firms make a major contribution other than the provision of money. Contributions cited by private equity-backed companies often include private equity firms being used to provide financial advice, guidance on strategic matters, for management recruitment purposes as well as with their contacts and market information.

Most private equity firms’ executives have a wide range of experience. Many have worked in industry and others have a financial background, but what is more important, all have the specialist experience of funding and assisting companies at a time of rapid development and growth. Levels of support vary, however, ranging from “hands-on” to “hands-off”.

Hands-on

A “hands-on” or active approach aims to add value to your company. In addition to advising on strategy and development, the private equity firm will have many useful business connections to share with you. The private equity firm aims to be your business partner, someone you can approach for helpful ideas and discussion. A hands-on investor is particularly suited to a company embarking on a period of rapid expansion. However, day-to-day operational control is rarely sought. In order to provide this support, some private equity firms will expect to participate through a seat on your board. The director may be an executive from the private equity firm or an external consultant and fees will need to be paid for the director’s services. The private equity firm will expect to:

• Receive copies of your management accounts, promptly after each month end.
• Receive copies of the minutes of the board of directors’ meetings.
• Be consulted and involved in, and sometimes have the right to veto, any important decisions affecting the company’s business. This will include major capital purchases, changes in strategic direction, business acquisitions and disposals, appointment of directors and auditors, obtaining additional borrowings, etc.

Hands-off

Some investors will have a less active role in the business, a “hands-off” or passive approach, essentially leaving management to run the business without involvement from the private equity firm, until it is time to exit. They will still expect to receive regular financial information. If your company defaults on payments, does not meet agreed targets or runs into other types of difficulties, a typically hands-off investor is likely to become more closely involved with the management of the company to ensure its prospects are turned around.

In reality
Most private equity firms in reality tend to operate somewhere between these two extremes.

Help to avoid the pitfalls

One of the private equity firm’s positive contributions to your business might be to help you avoid receivership or liquidation. They can help you spot the danger signs of troubled times ahead and avoid business pitfalls.

Examples of danger signs

• Lack of response to changing environments
• Fixed price contracts
• Increasing level of fixed costs
• Cash flow problems
• Breaches in bank covenants
• Failing to meet capital interest or dividend payments
• Increasing overseas competition
• Over-trading
• Deteriorating credit control
• Uncontrolled capital expansion
• Inaccurate and/or untimely management information
• Autocratic management
• Financial impropriety
• Early success, but no staying power
• Over expansion and loss of control
• High turnover of key employees
• Extravagant executive lifestyle
• Dependence on too few customers/suppliers

Directors’ responsibilities

As a company director you have onerous responsibilities to your shareholders and your creditors. Many of the duties and obligations of a director are mandated by the Companies Act 1985. Others are governed by the Insolvency Act 1986 (you should be particularly aware of the “wrongful trading” provisions contained therein) and the Company Directors’ Disqualification Act 1986. Under the wrongful trading provisions a director may, by court order, be made personally liable for a company’s debts if it is allowed to continue trading at a time when it was known, or should have been concluded, to be insolvent. Discuss any concerns with your private equity firm and other professional advisers before they become real problems and help to ensure success for you, your management team and your investors.

You should also have recourse to the new Combined Code on Corporate Governance which is aimed at enhancing board effectiveness and improving investor confidence by raising standards of corporate governance.

Guidelines for success

The following guidelines apply to most successful business situations:

• Stick to what you know – avoid industries in which you are not experienced.
• Encourage a common philosophy of shared business goals and quality standards so that you meet and even exceed the expectations of your customers. Communicate the objectives and results throughout your organisation.
• Avoid information overload – concentrate your management information systems on what is critical to success.
• Build your team – as your business grows, recognise the need to direct the company and to not be personally involved in each day-to-day decision, which should be delegated to senior managers.
• Cash flow – remember “cash is king”, take care to manage your cash resources with the utmost care.
• Anticipate problems – know what is going to be critical as your company moves through its various growth stages.
• Keep your investors, bankers and advisers informed – they are there to help and do not like surprises.
• Watch your costs – ensure that the market price of your products gives a profit contribution in excess of the costs you incur. This may sound facile, but it is amazing how often this is not assessed regularly, resulting in unexpected losses.
• Do not anticipate sales – the costs can grow by themselves, but the sales will not.
• Use the network – a well-developed set of business contacts is one of the keys to business success. These could include customers, suppliers, trade associations, Government agencies and professional advisers.
• Look for opportunities – the business plan is the agreed route forward for the business, but other opportunities will arise. Assess them, discuss them with your investors and pursue them if it makes sense for the business. Adapt your business plan as your company develops and new opportunities are considered.

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