THE journey toward raising funds via private equity can be frustrating. It can be a trek across a desert with plenty of mirages while the occasional oasis has poisoned springs.
John Gilligan, of PKF, the consultant, says: “It is easy to overestimate the interest of PE firms. They almost never say ‘maybe’, they say only ‘yes’ or, more often, ‘no’. Early in the process the potential investor is selling itself as your future partner so if it is interested it will be up-beat and positive. There is a process of flirtation going on and it needs to be understood as such. You would be surprised how many clients tell us that the deal is all sewn up and they just need help shepherding it over the line, only for the putative investor to say that it might be interested but it has concerns about half a dozen potential deal-breaking issues.”
You need all the ingredients that the private equity firm is seeking and a lot of luck. Yet as the Neoss story (opposite) illustrates, sometimes it seems easy. Some proposals appear to be natural winners.
David Baylis, of Norton Rose, the law firm, says it can be boiled down to three or four fundamentals. “Key questions are how good is your product or service and your management? A good product and good management is an excellent start. You may be lucky with very good management and a poor product. But a good product with a bad management is unlikely to succeed.”
Ideally the pitch should be strong on all fronts. In a PKF guide to attracting external investment, it says: “Private equity firms are looking to invest in businesses with strong growth prospects managed by experienced, skilled, ambitious people driven by the need to succeed.”
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So the questions to ask are: how credible does your management look? Do you have good track records? Do you come over well personally? What is your collective age profile? There are serious questions if all the top management are 50 and over. Baylis says: “Do they really have the hunger to drive the business? Are they still paying school fees or a mortgage?”
So a strong motivation and a high level of competence are critical. Successful PE investors can smell the difference between those with a nice idea and those obsessive to achieve.
After that, there will be deep questions about the product or service, its prospects and the market. “You really need an incredibly well thought-out business plan, says one consultant. PKF says it needs to be written in plain English “without jargon or fluff”. Depth of research is critical, but one question stands out. Where is the competition? PKF says you need to display evidence of real market knowledge and understanding.
Baylis adds: “Utilities, financial services and oil and gas are all very attractive because of their high barriers to entry.” That may be vital for a PE-backed management buyout but for small start-ups in the £1 million-£10 million range, what counts is the ingenuity of the idea or the level of technical expertise behind it. Clear explanation of the product or service is essential with the emphasis, says PKF, on why it is “different, better, cheaper, faster”.
The crunch question is the amount of finance required. Being able to explain how much is needed and other sources of funding (government grants, investment by the directors, bank lending or overdraft facilities) is a test of your strategic astuteness. Judge it right and the coffers may be opened for you.