Raising money with a Private Equity firm
16 November 2022 | Newsletter
Welcome to The Fight for Fairer Funding newsletter where we share the latest in the fight for fairer funding in investment, raise awareness and provide education in line with our Mission. This newsletter from Funding Focus founder, David B. Horne, is part of the platform that sheds light on the uneven playing field that female and under-represented entrepreneurs of all genders face when it comes to raising capital for their businesses. We hope you enjoy it!
Read our latest edition below.
In our last newsletter, we touched on Venture Capitalist and shared some helpful tips and a case study for those looking to attract Venture Capital firms.
This week we continue on the institutional investors topic and dive into Private Equity.
Like venture capitalists, PE firms will pool money from wealthy investors and manage it in a professional fund. Unlike venture capitalists, PE firms are risk averse and tend to invest in established businesses with a proven track record.
PE firms typically will not deal with early-stage companies. Unless you are a really established entrepreneur, it is unlikely they will be on your immediate investment horizon, but if you have had success with a VC firm and achieved solid growth, they may take on your business and help you expand into realms you hadn’t ever imagined.
To successfully raise money with a PE firm, you will need to demonstrate that your business has good profits, several years’ worth of audited financial statements and a solid management team. You will also need a high level of sales: anywhere upwards of $10 million a year. As well as this, you will need a connection into the PE house. They don’t receive thousands of applications a year like some VC firms do, but PE firms are still incredibly hard to get into.
We previously shared another article on what you need to do to successfully raise money with a Private Equity firm. If you’re at this stage and looking to apply, I’d suggest you have a read here: https://www.funding-focus.com/fundraising-tips-private-equity/
To learn more about PE’s here’s a case study extract from my book, Funded Female Founders.
PE BACKING AND A NEW CEO FOR ABC
Six years later, ABC had grown into a substantial firm, and Nigel and his network partners decided they wanted to realise the considerable gains they had made from their investment. As angel investors, they liked the thrill of early-stage businesses.
Rebecca’s VC firm had also seen a significant return on investment. As the fund it had invested from was nearing maturity, the firm was keen to sell its stake and return cash to its investors.
Annabel, Briony and Charlotte wanted to stay with ABC, but none of them wanted to be the chief executive of a company with sales revenues of $40 million and more than 100 staff. They wanted to find someone with the skills and experience to run the business now it had grown.
Rebecca and the chairman agreed to conduct a search for an experienced technology CEO who was interested in buying into an established business and taking it to the next level. After a few months, they found Jennifer who had an impressive track record and had recently exited from a deal with a software as a service business in a completely different industry sector. Jennifer and the PE house backing her sold the business to one of the global tech companies and both were flush with cash.
Due diligence was not dissimilar to what ABC experienced when the VC firm invested so everyone was well prepared for it, having lived under the strict adherence to governance rules the chairman had insisted upon. They agreed a deal whereby Jennifer came in as the new CEO of ABC and bought a 7% stake in the company. Annabel, Briony and Charlotte held 14% each, and the PE house acquired the remaining 51% from the angels and Rebecca’s VC firm.
Rebecca, Nigel and the former chairman resigned from the board. A new independent chairperson was appointed, along with a new CFO whom the PE house had worked with before. Two of the partners from the PE house joined the board as well.
Things went smoothly for a couple of years, until the next economic downturn and a global recession which lasted more than a year. Two of ABC’s large customers went bust and many more had to rein in their expenditure. ABC’s revenues were off nearly 20% compared to plan and the board acted swiftly to implement a serious cost-cutting programme.
Jennifer was decisive and put forward a plan to cut costs by 30% to ensure ABC could survive the economic downturn. This was a new experience for Annabel, Briony and Charlotte. Not since the first dip after Nigel joined the business had they faced such a challenge, and certainly not at this scale. It was hard. They had to make some difficult decisions and asked the staff to reduce their salaries rather than letting go employees, some of whom had been with them from the beginning. They knew it was right for ABC, but it was the hardest thing the three founders had had to do. The downturn brought opportunities as well. Several competitors were struggling, having not reacted as quickly as ABC to the changing climate. The PE house had deep pockets and, after some discussions, the executive team decided to put forward an acquisition strategy to the board. Over the next twelve months, ABC raised more money from the PE house and bought three of its largest competitors, becoming the unquestioned number-one player in several vertical markets.
Do you have any questions related to institutional investors? Let me know in the comments below!
Check out my book, Funded Female Founders: How to traverse the uneven playing field and secure funding to grow your business for more.
Until next time…
With love and gratitude,
David
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