A Good Time To Invest?

anthonykkingBusiness Development, Strategy

Introduction

According to the Enterprise Research Centre small businesses in the UK are growing at their fastest rate in seven years with the UK’s population of small and medium-sized enterprises (SMEs) growing at its fastest rate of growth since the financial crisis in 2008. Since the financial and economic crisis in 2008, around 13 million jobs were lost in the UK, according to ERC figures. However, net private sector job creation turned positive last year, as 13.4 million jobs have been created in the last seven years with more than 600,000 new jobs added in 2014 alone!

IT is also going through tremendous growth with global spending on IaaS expected to reach US$16.5 billion this year, an increase of 32.8% from 2014, with a compound annual growth rate (CAGR) from 2014 to 2019 forecast at 29.1%, according to Gartner’s latest forecast. This incredible rate is also driving Data Centre spend, alongside mobile and Big Data, to take spend to an estimated 143 billion this year alone!

Many key elements of the global managed services market are forecast to grow at double-digit rates. For example, Mobile (MDM) and BYOD managed services are expected to grow at around 27% per year through 2016. Private cloud services – where a service provider offers managed co-location or dedicated instances – are expected to grow at 22%. Public cloud services, as a whole, seems to be growing at around 17 to 18%, but within that, SaaS is growing at 19.5%, managed security services at 22%, and systems infrastructure and IT Ops management at over 40%. One of the fastest growth areas is office suites in the cloud, which is approaching a growth rate of 50% per annum. All of these represent significant opportunities for MSPs to support their small and medium size business (SMB) clients’ cloud migration plans and their IT service deployment, management, mobile computing and security needs.

Many companies are looking to take on investment to help them accelerate growth rates to more fully take advantage of a strong market with increased levels of demand. In some cases this investment will also allow the release of locked in value from shares. Investors are also enjoying the expanding market and the ‘Prequin Global Private Equity & Venture Capital Report’ recorded that last year 994 Private Equity funds managed an estimated $3.8 trillion of corporate assets, with another $1.2 trillion of ‘Dry Powder’ waiting to be spent! It also highlighted that 2014 saw over $400 billion invested and over $500 billion of successful exits.

Investment Types

There are a number of approaches in Private Equity to invest in a business and these include leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. Growth Capital fundraising results typically in a minority equity stake and has increased by nearly 70% to €1.8 billion, the highest level since 2011 as more SMEs are looking to scale, develop new services and products or acquire other businesses, or a combination of these.

All investors will evaluate a target client via their own checklists and it is important that the target client also profiles the type of investor that they want to work with, key questions will include:

  • How well do they understand your business model, or have direct experience in your particular industry. Take a close look at their current portfolio and focus areas. What does this indicate about their broader knowledge of your business?
  • Is this the first investment of this type for the investor?  Without prior experience they may not have the right networks in place to help you, or the capability to add value for any advice and decision-making.
  • Just as it may be important for the investor to understand your business, you need to understand how committed they will be to your particular area or business category.  Do they have other portfolio companies in the same space? Are they planning to invest in more companies like yours, or are they retracting from this category?

Choose wisely!

It is particularly important that you choose carefully and we can only emphasise the importance of fully assessing prior to committing to a long term relationship and Korolit can provide you with a comprehensive balanced scorecard to assess potential investors against.

The best investors are prepared to build a relationship over time with their potential clients and provide guidance and support ahead of any transaction. Dealing directly, and only, with an investor is also not recommended. Few SME’s have prior experience of the process and independent support and guidance is recommended throughout this process to both help prepare, manage expectations and catalyse the best outcome for all parties.

Once engaged the process broadly is comprised as follows:

  • Sign exclusivity agreement
  • Commence Due Diligence work (issue Vendor Assist if available)
  • Review report and agree terms with bank
  • Update company paperwork and sign new contracts

These four bullet points would expand into several pages of plan and the process can take 2-9 months depending on the size of the business and any associated complexities that need to be addressed.

Performance

A very important point to understand about private equity is that all investments centre on improving the business and ultimately increasing its value over the long-term. Private equity investors succeed only when the companies they own succeed. If a private equity company fails to succeed, it not only loses its own money, but also that of its investors, ultimately damaging its ability to raise future funds.

To succeed in improving the performance of a portfolio company a private equity firm needs to supply a great deal more than just financial creativity. Developing organic revenue growth is key to securing increased value within a company. To further enhance a company’s performance it is also crucial to undertake substantial operational improvements, cost and waste reductions, improving the company’s competitiveness, product repositioning and ability to enter new markets, as well as the development and execution of a sound business strategy.

Exit

At the end of the holding period, an exit from a portfolio company is usually sought through: an initial public offering (IPO) or flotation of the portfolio company on the stock market; a ‘trade sale’ of the company to a strategic acquirer through a merger or acquisition (M&A); or a ‘secondary sale’ to another private equity house.