Q: What is private equity?
A: Private equity is funding offered in exchange for equity in an operating company, where shares are not yet publicly traded. The management buyout, or MBO, is a classic private equity transaction. When a business wishes to facilitate growth, but requires funding to unlock its potential, it can actively seek out private equity investment. This usually comes from a private equity firm or fund.
Q: Why is private equity more prevalent now?
A: Before 2007, bank debt was readily available and it had become the norm to use it for all types of funding requirements. Now companies may need to consider alternative forms of capital to blend with bank debt to achieve their growth ambitions. Having this more cautious approach to how debt is used is not wrong, it is simply a return to a more traditional view of how a balance sheet should be constructed, with an appropriate place for equity.
Q: What are the benefits and pitfalls of private equity?
A: You need to look at the value being added to your business. By selecting the right private equity partner, you will get full board involvement, bringing with it a range of experience. They may also provide cross-selling opportunities and access to contacts.
However, you should be very clear about the expectations of the private equity house and make sure these align with your own plans. For instance, you have to agree timescales, and what the process will be for exit, or else things can go badly wrong.
You also have to remember that you will be bringing into your business an outside shareholder, to whom you will be accountable. They will want to make sure they are heading towards their targeted return based on growth, so be prepared to provide regular reports and management information.
Q: How do you find the best investor for your business?
A: Put aside the time to meet a good number of potential private equity partners. Know what you want and what your ambitions for the company are, then select firms with similar interests, experiences and time horizons.
Q: How can Santander provide support?
A: We have particular experience working with mid-market private equity firms, so we know the industry well. If a business is thinking of looking for growth capital, we can hopefully direct them to the right people. Also, as part of our Breakthrough programme, we have a growth capital business targeted at companies with a business turnover between £1 million to £10 million. We look to invest growth capital loans specifically to help these businesses grow, but with no capital repayments, giving them space to generate cash and then repay the loan or transfer the balance to standard debt.
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