for owner managers to raise growth capital from highly experienced investors, usually to support buy-and-build acquisition strategies, with less reliance on leverage. There can be a reluctance by owners to sell equity to support growth strategies, but with the right structure and partner, the returns for both the founder and the investor can be very attractive. For management teams, private equity is a source of not just capital but also professional investors who are highly experienced in working with high performing teams delivering on ambitious business plans. The PE funds will usually help supplement the Board of the business and provide strong input in advising the team on the delivery of their plan. This will often include particular sector expertise, experience in internationalisation, expertise in executing on acquisition strategies and access to particular skills (e.g. digital or sourcing experts).
Private Equity Demystified | Driving growth and performance 04 How are PE deals funded? The private equity funds themselves are backed by a range of sources (Limited Partners or LPs) including institutions such as pension funds, insurance companies, high net worth individuals, government bodies (including ISIF in an Irish context) and banks. The stage of a fund cycle of any particular fund considering a deal is a very relevant indicator of appetite and capacity to transact. PE funds with recently raised funds will typically be aggressively pursuing new deal opportunities. This can be more challenging pre or mid fundraising. In conjunction with the equity funding from the PE fund, debt will usually represent a significant portion of the funding to support a transaction. This is typically senior debt and may also include working capital facilities, and there is often secondary debt sitting alongside senior debt. Evaluating the overall funding structure and associated cost in the financial model of the target business to understand future cash flow impacts for the business, in line with the overall plan for growth, is a key element of the Vendor advisor’s role; working closely with the finance team to ensure that the business is appropriately structured to deliver on its business plan. Debt can be stapled or soft stapled (where in effect the terms of the debt are secured/agreed by the Vendor’s advisors such that the Bidders are all assuming similar minimum debt terms); which impacts directly on the size of the equity cheque and the overall price. For the business going forward, ensuring that the level of debt in the business post transaction, the caveats, repayment terms and structure of the debt package is appropriate and not restrictive is key, particularly if an ambitious growth plan is being pursued. This is also somewhat linked to the level of surplus cash being extracted by the founder at completion, and the overall capital structure of the entity post transaction.
- Fall '18
- Venture Capital, Private Equity Demystified