BGF explains: what do private equity investors look for in a business?

Our ‘BGF explains’ series is aimed at demystifying the world of business funding by explaining the meaning of key financial terms. We aim to cover everything you might want to know, whether or not it’s a service we offer at BGF. Learn more about our offering here.

Private equity investment is a form of business funding that plays an important role in helping businesses of all kinds to grow. It is a form of equity funding, in which investors provide financial support in return for a share of your business, and it happens away from public markets, in companies that are held privately.

Private equity is usually distinguished from venture capital investment by the growth stage of the target business. Venture capital investors tend to target early-stage companies, while private equity investors tend to target more established businesses. However, the aim in each case is to achieve growth.

Entrepreneurs should seek independent advice before making the significant decision of whether to sell part of their company. In this article, we provide general information about what private equity investors look for in investee businesses, and explore the types of businesses that could benefit.

1. Fit

Which investors are interested in your business?

Private equity investors come in different shapes and sizes. Some specialise in a specific sector, such as healthcare, while others are generalists who invest across all sectors.

Some firms aim to make only large deals, worth more than £100 million, for example, while others target smaller deals. Some firms distinguish themselves by the particular skills they offer – for example they may excel in helping companies expand internationally.

Another point of difference is that some private equity firms will only invest in exchange for a majority stake that gives them control of the business. Others are willing to be minority shareholders or to co-invest alongside other investors.

In short, there are many reasons why a private equity investor may be interested in your business, including your sector, the stage in your business lifecycle, the location of your business, the valuation of your business or the financial position of your business.

A crucial first step in attracting a private equity investor is to understand what qualities of your business may be attractive to which investors.

2. Financials

Do you have sufficient financial information available?

Private equity investors pride themselves on making sound investment decisions based on all the financial information available to them. This is likely to extend beyond the accounting documents you compile annually or quarterly and might include market data, supply chain information, information on customers (existing and potential) and other forms of market analysis.

Intricate financial records, extending over relevant timelines, will be crucial during any negotiations. Keep in mind that private equity firms will likely want to run sophisticated reports and request projections based on a variety of factors, so having a reliable financial function to handle these requests will be helpful.

You will also want to ensure that your accounting practices comply with the relevant reporting standards.

3. Management team

Do you have the right people with the right expertise?

Potential investors will be keen to get to know your management team. They will want to develop a good professional relationship based on trust, so be prepared to have meetings with them before a deal is signed.

However, they will not be looking solely at how your team performs and how skilled they are, but what their responsibilities are, their key measures of success and more.

One crucial person in the transaction will be your finance director or chief financial officer (CFO). It can be helpful to have a CFO who has experience with handling the requests that are common from private equity houses, as this can make the process go more smoothly.

In general, it’s important that your management team is aligned on the main issues. Investors will want to see a clear vision for the future of the business that supports the long-term growth ambitions explained in your business plan.

4. A well-thought-out growth plan

Do you have the right plan to appeal to private equity investors?

It’s important to be able to communicate your growth plans for the business. By investing in you, a private equity investor is joining you on a journey. You want to show them the destination you hope to reach and how you plan to get there.

Equally, you should consider that a private equity investor may have their own ideas about what the growth plan should be. It’s important to be upfront about your ambitions to ensure your interests are aligned with those of your investors.

You should be very clear about the timelines for your plan. Some private equity firms may wish to achieve a return on their investment within a relatively short time period, perhaps one or two years. If you are looking for long-term financial backing, you should make that clear in your business plan.

How does BGF fit in?

BGF provides growth capital to small and mid-sized businesses across the UK and Ireland, investing across sectors and in every region. We are a minority investor that invests in businesses we believe in, without seeking to take control. We invest patient capital, meaning we don’t set hard exit timelines, allowing companies in our portfolio to grow sustainably at the pace that is appropriate for them.

BGF typically makes initial investments of between £1-15 million. The combination of being a minority investor of patient capital that makes investments of this size is distinctive and distinguishes us from most private equity industry. For this reason, BGF’s offering is “different by design”.

BGF is the most active growth investor in the world in terms of number of investments, averaging about one investment a week.

The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances.