What Private Capital Can Do for Your Business

Typically venture capital funds are associated with investment in start-ups and early-stage companies. But what about more mature profitable companies — where can they go to fund growth outside traditional banking sources?

Private Equity — or sometimes referred to as “PE” — is the umbrella term for a broad range of investment funds that pool investors’ money together to make investments in private companies. The fund then employs an experienced investment manager to source fund investments to generate value through investment growth. Unlike most listed investment funds, in which the fund trades shares on active public securities exchanges, private equity funds attract investors who are willing to hold investments in privately-held companies whose shares are not publicly traded (hence the term private equity). These PE Investors are constantly on the look-out for new investment opportunities.

It is not just money that PE Investors offer –PE Investors offer a range of skills and disciplines to complement and support a company so that opportunities are maximised. 

The good news for established business owners is that there are a number of PE Investors investing in growth-oriented, revenue-generating companies in New Zealand. Plus, these funds are also inclined to invest in a broad spectrum of industries and geographies e.g., multi-location service companies, franchise operators and manufacturing businesses.

So, for business owners, what can a PE Investor provide? Here are five common investment scenarios that might help your company as its funding needs evolve.

Buy the whole company. PE Investors can acquire 100 percent of the outstanding shares of your business, realising value for founding shareholders and previous investors. The PE Investor and founder may agree for the founder to retain shareholding or to continue to manage the business, or the PE Investor may consider a whole new senior management team and board of directors.

Flexible investment approach. It’s also possible for the PE Investor to acquire a specific shareholding (e.g. just the owner-founder) while keeping existing investors in place. Sometimes owners sell because of illness, matrimonial issues, retirement, boredom or unsolvable squabbles with investors. Founder buyouts are also possible when management team partners with a PE Investor to finance a “management buyout.” Often, PE Investors are more attracted to investing if a controlling stake is available. The great thing about a PE Investor is they have the strategic capability and capital backing to invest in companies, but to also assist with growth strategies, thereby creating less uncertainty for business owners.

Buy out existing shareholders. Old investors can become “tired” shareholders, especially if they’ve been involved for five or more years in a privately held business. The terms of these transactions can be tricky but achievable, especially if the underlying company still has considerable growth prospects ahead.

Invest in expansion capital. Owners of prosperous businesses often lack access to capital. Every business and personal asset has already been pledged as collateral on bank loans, jeopardizing the company’s growth prospects and competitive standing. PE Investors can help growing business owners continue their growth ambitions with capital funding for acquisitions, new product line development or geographic expansion.

Recapitalise struggling businesses. PE Investors are not reluctant to consider investing in companies with “challenges,” provided they are good candidates for a near-term turnaround. In private equity lingo, “recap” funds seek to recapitalise or restructure a company for the future. But don’t expect fund managers to support the same business plan and management team that got the company in trouble in the first place. Recap and “special situation” funds are looking for clever ways to reinvent a revenue-generating business and build it back to profitability.

What’s most important for New Zealand business owners to know about PE Investors is that they are more than financial investors. Unlike corporations that might buy all or part of a business for strategic operating advantages, New Zealand based PE Investors invest in accelerating shared ambitions with shareholders and management teams of established New Zealand companies. They may be sensitive to a founder’s wishes, but not sentimental in negotiating final investment terms.