What do companies that are considering taking private equity investment on board need to know? Fiona Walsh checks the pulse of those that know.
Taking on a private equity partner is one of the most crucial decisions a management team will ever make. Choose the wrong partner and you run the risk of destabilising the business you have worked so hard to help build up. Choose the right partner, and the rewards - for all parties - can be immense.
Even before management teams decide on the merits of potential private equity partners, there are tough decisions to be confronted. They must take a long, hard look at their business and its prospects and decide if this is truly the right move to make. And if it is, is this the right time to make it? Only when the answer to both those questions is 'yes' should they go ahead.
It is all too easy to get caught up in the excitement of being your own boss, says Richard Moon, chairman of architectural hardware group Securistyle. "I have seen situations where, despite all the advice, people are blinded by the thought of owning their own company. But, once you do, you have to take full responsibility for everything. It can come as a great shock to someone who has come out of a big company."
Increased competition among private equity providers means management teams will usually have several private equity partners to choose between. "The management need to know what sort of returns the private equity houses will be looking for, and when the likely exit will be," says KPMG's Mick McDonagh. "The two sides' objectives have to be aligned."
Different companies have different needs - for example, if growth is based on acquisitions, there is no point choosing a private equity partner that will not be willing, or able, to make further cash injections to fund those deals.
It is also important to understand what level of involvement your private equity partner will want. "Managers need to understand the variety of controls," says John Lane at PricewaterhouseCoopers. "Obviously, in an Armageddon situation most houses have some right to protect their investment, but the level of control demanded in a normal trading environment can vary quite markedly between different investors."
Companies should consider taking on a partner that has expertise in their particular sector and a good track record of delivering. They should also look at how big their potential partner's portfolio is: "Will you be one of five or one of 50?" asks Lane. "And which would you prefer?"
A key point to remember is that this is very different from taking out a loan, says Mark Pacitti at Deloitte: "This is not raising money from a bank. It's about taking on a fellow shareholder. You can't simply take the money and say goodbye. You'll be seeing them every month at board meetings."
One thing on which everyone involved in the private equity industry agrees is that personalities play a vital role. "Even if they are a hands-off outfit, the private equity guys will be your business partners and you will have to work with them over the next three to five years," says KPMG's McDonagh. "They will hold a lot of cards, in terms of when the business is exited, how and to whom."
As well as providing investment capital, the private equity provider can also help with networking opportunities and management expertise. In the case of Securistyle, for example, it was August Equity's Ian Grant that suggested Richard Moon as a potential non-executive chairman when it backed the MBO of the business in 2003.
Moon clicked with the management team and has played a big part in helping the business pursue its post-buy-out strategy. "People looking to take on private equity must get on well with the private equity provider, no matter how good the offer or deal is. If there is no trust or mutual respect, then the relationship will be fraught with problems, says Moon.
Moon says managers also need to understand what they are stepping into. "Many people are attracted to being their own boss, but they need to know exactly what that means. Managers have to ask themselves some fundamental questions. Is your team up to the challenge? Do they have the appetite to see it through?"
A big concern of most management teams is that they may be swamped by their new shareholders. But this would simply not be in anyone's interests, according to Pacitti: "Their raison d'etre is to create a capital gain for their fund. They invested in a good business with good growth prospects and they would not want to do anything to upset that."
"Our business is all about helping management achieve their financial and personal objectives," Richard Green concludes. "If we do that to the best of our ability and maximize the opportunity for management, then our investors will do very well indeed."
Boat International Media Limited (Boat International), the world's leading publisher of superyacht magazines, is the latest company to join the August Equity portfolio, following a £29 million management buy-out.
The company issues 13 titles, including Boat International, Boat International USA and Mer & Bateaux. It also organizes the World Superyacht Awards, to be held in Venice in April. The investment builds August Equity's already strong media portfolio.
Boat International serves the growing number of ultra high net worth individuals across the world and their increasing investment into the superyacht market. The company's publications have flourished as a result.
Under the terms of the deal, August Equity managed funds invested £13.4 million of equity. The management team co-invested with debt facilities provided by Lloyds TSB Corporate Markets. Sir David Arculus, the former group managing director at EMAP and ex-chairman of O2, has been appointed as chairman.
"Boat International presents an opportunity to build upon our already strong media portfolio and was our second publishing investment in 2006," said August Equity's Fraser Davidson. "We had been interested in the company for quite a while and we built up a strong relationship with the management team. We will be supporting the team to achieve growth both organically and via acquisitions."
Tony Harris, CEO of Boat International, believes August Equity's investment will help the company develop its business: "We have shown strong growth in recent years. August Equity's long experience in the media publishing world demonstrates a powerful endorsement of our business and future growth prospects for our products and services."
Securistyle, the Cheltenham manufacturer of architectural hardware products, including hinges, locking mechanisms and handles for windows, doors and conservatories, has been sold in a £42.3 million deal to Bank of Scotland Integrated Finance.
The exit completed in December 2006. August Equity managed funds invested £11.3 million to finance the management buy-out of Securistyle in November 2003. The company had already completed a refinancing in February 2006, enabling August Equity to return half the original cost of its investment to investors.
Andrew Hartley, managing director of August Equity, said: "It is very satisfying to see investments in manufacturing facilities, product development and the international sales network, achieving results for the business. Securistyle is a great example of an innovative UK manufacturing success story, which will continue to shine under this management team."
Paul Cook, CEO of Securistyle, added: "We are grateful for the support August Equity has shown the company in the past three years. The knowledge and experience that the investment team has brought to the company has helped us to position our business to continue its excellent record of long-term growth."
The trade sale of RedSky IT to Explorer Software is the latest exit completed by August Equity.
The deal was completed in late January and marks the end of a relationship dating back to 1999, when August Equity backed a £30 million management buy-in of Ramesys Holdings. Ramesys Holdings was established to acquire eight businesses from Misys. The companies were focused on developing software applications for specific market sectors such as contracting, travel, leisure and utilities.
During the investment period, Ramesys also acquired a UK e-business consultancy company and a US software house operating in the hospitality sector. Following the sale of Ramesys' Education Division in a secondary buy-out in 2005, the remaining Application Software Division was renamed RedSky IT.
"The sale of RedSky IT concludes the two-part exit strategy implemented in 2005," said RedSky IT chairman Jon Richards. "Under Gordon Matthew's leadership, product areas were streamlined, support operations were integrated and business performance improved to match industry best practice."
August Equity will change its regulated entity to become a limited liability partnership.
The motive behind the move was to create a framework that makes it easier for new and emerging members of the team to be promoted and gain access to the partnership. Macfarlanes, the law firm, advised August Equity on the restructuring, which will become operational at the beginning of April.
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