Private equity provides access to capital and strategic know-how which can be used to support business growth and ultimately increase shareholder value.

The capital which a private equity investor can provide may otherwise not be available to a business from existing shareholders or more traditional sources such as banks. In addition, private equity provides flexible, patient capital tailored to the business and its growth strategy.

As well as access to capital, private equity investors will also use their significant experience and business network to support and add value to their investments with a view to accelerating growth.

Private equity will invest into a business with a view to driving growth over the medium term, with many funds having an investment horizon within 3 – 7 years. As such, private equity will wish to ensure that the business is well-invested and can clearly demonstrate growth in profitability throughout the period of investment such that it is an attractive opportunity for a subsequent investor or trade buyer and ultimately maximise shareholder returns.

How can private equity help a business grow?

Private equity can be used to help accelerate the growth of a business both organically and through acquisition. Detailed below are some of the key areas in which companies can benefit from the involvement of a private equity investor:

1. Capital: private equity provide access to capital which can be used to drive growth initiatives such as expanding into new markets and geographies, the development of new products or services, investment in new technologies and innovation, new or expanded premises, investing in people and acquiring other businesses.
2. Equity incentives: many private equity houses will put in place equity incentives for those individuals in the management team deemed as key to the success of the business going forward. This helps incentivize key management to drive the business and achieve the growth objectives as well as supporting a clearly defined management succession strategy for a future exit.
3. Knowledge and expertise: private equity firms have a wealth of experience in helping companies achieve their growth potential and can provide significant support on key areas such as strategic planning, finding new growth opportunities, corporate governance, marketing support, operational and efficiency improvements, and ESG.
4. Partnerships: private equity funds will have extensive networks of contacts that can be extremely valuable to growing businesses. Investors will look to support their investments in a number of ways including providing access to industry experts, using members of their network to help introduce new business opportunities, and facilitating discussions with a range of debt providers who can also help support the growth strategy.
5. Credibility: having private equity funding in place can help enhance both the reputation and credibility of a business. This can be extremely beneficial across to a business in areas such as looking to secure additional funding from other investors or banks, winning new customers, and attracting and retaining quality staff.
6. Multiple arbitrage: this is a term applied to the situation where, as a business scales in terms of profitability, the market will value the business based on a greater multiple of EBITDA than applied at the time of the initial investment. Companies can benefit from this on two fronts: (i) as they acquire other businesses as part of their growth strategy, for example a company valued at 6 x EBITDA, buys a business valued at 5 x EBITDA with the overall value of the combined entities valued at 6 x EBITDA post acquisition; and (ii) on exit where the investors will hope to achieve a valuation based on a higher EBITDA multiple than when they made their initial investment given the growth in EBITDA over the investment period. 

Summary

Private equity can play a significant part in a business’s overall growth strategy. A combination of access to funding, expertise and resources can help accelerate business growth opportunities and generate significant additional value for shareholders. 

Next in this series of blogs, we will be focusing on value creation from exiting a private equity transaction.

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If you would like to discuss this further, please don't hesitate to get in touch with me, or a member of the Corporate Finance team.