Guest comment by Flor Kassai
A challenging backdrop has forced many businesses to pivot into defensive mode and re-think growth plans multiple times in the last few years. Companies that took on debt may find they’re now overleveraged, both because margins are squeezed and interest rates are creeping up.
Equally, firms seeking funding now may find banks are less willing to lend at the quantum or terms they could have achieved just two years ago. This means businesses looking to grow may have to consider other funding options, according to Flor Kassai, Partner at Inflexion.
Many businesses face critical junctures – opportunities to buy another business, rethink their digital offering or expand geographically, for example – which can be as tricky as it is exciting.
Or they may be looking to buy their business out from a parent, or even plan for their own succession as time passes. For years, banks have provided a source of capital for such endeavours, however today’s economic backdrop has seen a liquidity squeeze and therefore a reduction in bank lending.
Just as no two businesses are alike, their plans will be different and so ensuring a private equity partner is well suited is important
Private credit funds on the other hand have committed capital and so are less affected by interest rate rises than their traditional bank counterparts. Their capital preservation focus means they require regular repayments and maintenance of pre-agreed revenue and profit levels to keep covenant headroom clear. Nowadays most are also demanding tighter terms for borrowers.
Private equity offers firms the ability to take a longer-term approach to growth, and benefits from being able to provide both capital and expertise – helping companies to achieve their goals more quickly than if they attempted the growth on their own – but without the onerous reporting requirements and short-term investors publicly listed companies are subject to.
Partnerships vary but are typically three to seven years, kickstarted by a 100-day plan during which time the foundations are laid for a value creation plan agreed by private equity and management. Ownership stakes can be minority or majority, giving owners flexibility with flexible funding.
Some firms will be in regular dialogue with their backers and others may have less frequent touchpoints; the level of interaction will depend on the firm and the plans.
Just as no two businesses are alike, their plans will be different and so ensuring a private equity partner is well suited is important – both in terms of sector expertise as well as experience in the areas you’re looking to grow.
M&A can transform a business if done correctly. If a company is looking to expand by way of acquisition, there are lots of areas to consider: identifying targets, considerate negotiations with relevant parties, funding to facilitate, and post-transaction integration. Pure debt provides the funding, but an experienced partner can make a real difference across all aspects of this.
Executing a well thought-out digital strategy can help businesses across all sectors provide a better customer experience and build up valuable data.
Whether overhauling a website to better serve clients and generate valuable data, or implementing a new software platform to streamline business operations, embracing digital can help businesses to provide a better customer experience and open fresh efficiencies and opportunities.
And it’s not just for high-tech companies; many old-world industries in manufacturing are adopting systems to create a better customer experience, with digital platform enabling customers to self-serve and the suppliers to build up client data. While firms can undertake this in-house, having support with experience in this area can help businesses to grow faster in this space.
Firms may also look to grow by expanding overseas, which can be achieved through M&A, organically, or a combination of both. Many private equity firms have an international presence whether through offices or networks, and these can help with warm introductions and local know-how.
securing strong hires for fast-growing businesses is as time consuming as it is challenging. Financial investors often have diverse networks to draw on to build out leadership teams
Commercial success is key to any business, and today’s inflationary backdrop is making that more challenging than ever. Some investors have in-house skills in helping their investments to establish the right product-market-pricing fit as well as strong sales execution to accelerate revenue growth.
While data is at the heart of this, coaching sales teams to understand this and use the information to help align pricing with value delivered and communicating that to customers is a crucial step towards success.
An increasing number of companies are looking to boost their ESG credentials. This is great news, but can be a daunting task to embark on as regulations keep changing.
Private equity firms are increasingly boosting their ESG frameworks as they realise the positive impact it can have on multiple levels, and so have experience in this journey themselves. It means they are in a position to lead by example, and doing so helps their portfolio companies boost employee engagement, cashflows and valuation.
The right talent is crucial to growing a business, and this changes as a company’s growth plans change. But securing strong hires for fast-growing businesses is as time consuming as it is challenging. Financial investors often have diverse networks to draw on to build out leadership teams by identifying key hires and thinking creatively of ways to nurture and retain the best people.
In short, an experienced private equity partner can bring more than just capital; they can bring expertise crucial to support growth. In these uncertain times, a backer with experience in managing through economic downturns with a culture of support can make a big difference to growth journeys.
Flor Kassai is a partner in the private equity firm Inflexion
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