CFOs looking for an injection of equity capital may find opportunities to partner with experienced managers to take the business forward.
Savvy CFOs know that the key to successful private equity investment is to choose the right equity partner.
According to the Australian Private Equity and Venture Capital Association's (AVCAL's) 2017 Yearbook, private equity firms have $7.69 billion of 'dry powder' to invest in promising high-growth businesses going into 2018.
To access this, CFOs may consider aligning their business goals with those of potential private equity partners.
Up the curve
AVCAL's Chief Executive Officer Yasser El-Ansary says in Australia over the past decade, private equity has tended to buy into high quality businesses with a strong growth profile.
No one sector dominates, with private equity available across a fairly broad range of industry sectors.
“We've seen capital deployed into retail and consumer products. We've seen investments into food manufacturing, food technology and agricultural technology. And we've seen investment in manufacturing, financial services, tourism and hospitality and healthcare," says El-Ansary.
“Private equity tends to be broad in its perspective because it is always looking for a very strong, compelling story around a great business with strong growth prospects, both in an Australian market context as well as a regional and global market context," he adds.
According to El-Ansary, there are only a small number of sectors in which private equity tends not to deploy any or much capital.
“These include residential property developments or infrastructure assets and to an extent mining assets, although there are some private equity funds that have a niche market focus on the mining and resources sector."
Over the past few years the momentum in the market has favoured sellers, who have been holding out for favourable terms and valuation numbers.
“That's been driven by the fact organic, top-line growth within most sectors has been hard to come by," says El-Ansary.
That has pushed many businesses to look at acquisitions as a means to delivering earnings growth. But the market is shifting now; and there has been a more consistent meeting of minds between buyer and seller.
“That trend will continue over the next few years as we see a challenging macro global environment around growth," El-Ansary says.
“It will start to become more important for businesses to complete deals as a way to deliver strong returns," he adds.
A meeting of minds
El-Ansary advises CFOs to think about the business drivers that prompted their company to take on outside equity investment from a private equity firm. “It's all about finding the right partnership," he says.
It's important for CFOs to identify the right match to ensure they get along with the people they will be working with on a day-to-day basis, he adds.
“What matters in the end is that you can work alongside the equity investors in a constructive way, where there's clarity and unity around what you are trying to achieve and how you will go about achieving it."
Private equity firms will often look to management teams to chart the business's growth course.
El-Ansary says in the best relationships, and to produce the best financial outcomes, the CEO and CFO have a very clear vision for the business before they approach an equity partner.
“They know exactly what can be achieved and how to get there. And they've identified the gaps and roadblocks between where they are now and where they want to go."
In some cases, overcoming roadblocks will require a pool of capital.
In other situations, the business may not have the requisite skills and capabilities in-house to achieve milestones or outcomes.
Other cases may see the business needing access to a group of people who can open doors for them and connect dots in a way in which management is not currently able.
“When you know what you're looking for, you'll know very clearly whether the private equity firm is capable of delivering. That's critical because this is fundamentally a partnership," says El-Ansary.
A hands-on approach
Private equity investors are generally active participants, unlikely to simply transfer cash, walk away and come back in six to twelve months, hoping things are better.
This investment model usually involves the private equity firm investing capital, time, skills and expertise to help grow the business in partnership with the management team.
That starts with making sure the relationship is the best it can be, which requires open and honest communication.
Private equity managers look after other people's money. Their stakeholders could be superannuation funds - and therefore “mums and dads" across the community - or perhaps endowment funds, sovereign wealth funds or others.
The onus and legal obligation is on private equity managers to look after their clients' money.
“That goes a long way to understanding the context in which private equity firms operate," El-Ansary explains.
“Private equity firms don't like surprises. If there are problems in the business, they want to hear about them in real time. They want to understand the genesis of the issue and they want to focus on solutions."
For that reason, CFOs will do best when they set up regular reporting and other communications processes.
“It seems counterintuitive to me that, as a business owner or manager, you would look to insulate yourself or hide from addressing a challenge the business is encountering. You have a group of individuals sitting alongside you in the private equity firm who collectively could do a good job helping you solve that problem as a shared responsibility," says El-Ansary.
Well-prepared CFOs looking at - or already partnering with - private equity businesses could often use the situation as an opportunity to draw on the skills of a group of people who know how to develop a business.
- CFOs could benefit from establishing partnership-style relationships with private equity firms.
- Private equity partnerships work best when both organisations derive value.
- CFOs often look to private equity firms for funds, but may also find value in the firm's managerial or technical expertise or their professional contacts.