Understanding private equity

Understanding private equity

September 19, 2011 by Mike Southon

If you are a successful company that has survived the recession with a healthy order book, there is some excellent news: there has rarely been a better time to raise private equity investment, as there is plenty of money available for the right opportunities.

Private equity is the term used for investments in private companies, so includes venture capital firms, which look for high-risk, high reward opportunities, the next Autonomy or eBay. It also includes more traditional private equity firms, which provide development or replacement capital to more established companies to enhance their product ranges and improve their management teams while facilitating growth and succession.

The relationship between entrepreneurs and their investors can be an unhappy one, due to mistrust on both sides. Entrepreneurs are convinced of their own rectitude and the industry-changing nature of their companies.  They often view private equity companies as aloof and only focused on driving their “baby” towards a lucrative but morally suspect exit, such as a trade sale or public flotation.

When the going gets tough and the private equity company starts talking about replacing the original founders with professional managers, the early euphoria around mutually advantageous exit strategies is long forgotten.

Guy Rigby has seen the world of private equity from several different angles. He qualified as an accountant before building and selling his own practice. Later, he moved into sales and marketing for a professional services company, which itself had a successful trade sale.

He now runs the entrepreneur group at Smith & Williamson, a top ten accounting firm who provide all the usual finance, tax and wealth management services. Most of Rigby’s own time is spent with successful owner-managers, often helping them navigate the mysterious world of private equity investment.

He recently ran an event, “Investing for Success”, which was attended by entrepreneurs, private equity companies and the press. He was struck by the lack of community and deep suspicion in the room.

The entrepreneurs had heard the stories of unscrupulous private equity companies exiting with substantial personal gains from companies that collapsed soon thereafter. The press had understandably leapt on this as an example of capitalism at its worst, leaving the reputable private equity companies wondering how they had acquired such a bad reputation.

Rigby feels that there is a significant communications gap between entrepreneurs struggling to find the right private equity partner, and investors who seem distant and remote to those who will create the next round of wealth.

Much of this problem emanates from a lack of understanding. From the outside, private equity investors inhabit a rarefied and secretive world. They pop up and grab an opportunity from time to time, but few understand how they operate and what they really do.

But above all, Rigby believes that private equity is essential to help rebuild the UK economy. He feels strongly that private equity firms must work harder to improve their image in the marketplace; they should engage better with the media, particularly the entrepreneurial press, providing success stories of growth companies, not tales of woe and asset stripping.

Once entrepreneurs see examples of private equity backed companies grown successfully and ethically for the mutual benefit of employees, customers and shareholders, they will be more inclined to see this important form of funding as a way to realise their ambitions.

Rigby has scheduled an event, ‘Inside Private Equity’ in November for entrepreneurs and investors. Market recoveries are always fuelled by wise investors looking for the best opportunities, so now is the time to repair the image of private equity and start a sensible dialogue with the best entrepreneurs.

See Smith & Williamson’s Event “Inside Private Equity”.

Originally published in The Financial Times. Copyright © Mike Southon 2011. All Rights Reserved. Not to be reproduced without permission in writing. Mike Southon is the co-author of The Beermat Entrepreneur and a business speaker.

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