M&A 2017: Why private equity is the rocket fuel for start-up growth

In the GrowthBusiness M&A Guide 2017, August Equity's Philip Rattle explains what private equity can do for start-ups looking to grow.

This article was originally published in the GrowthBusiness M&A Guide.

The M&A Guide is aimed at entrepreneurs and owners of growth companies, summarising the state of play of the dealmaking landscape and the various elements of the ecosystem over the past year. The aim is to help business owners understand whether a merger, acquisition, sale, or going public is right for their business, and the types of advisers and expertise they may require along the way.

Private equity: rocket fuel for growth

The year 2016 was one of change. The living wage came into effect; the EU Referendum revealed a nation divided and sent markets spinning into uncertainty, and in November the US elected a new president – against predictions in the opinion polls – to lead it from January. Some might say change was the only constant.  

Markets do not like uncertainty, and private equity is not entirely insulated from that. Certain segments of the private equity markets were more impacted than others in 2016, and we are likely to see this continue into 2017. For example, recent figures reveal a dramatic decrease in European private equity activity, which fell nearly 40% in 2016 versus 2015 values, according to CMBOR, Equistone Partners Europe, and Investec Bank. Perhaps unsurprisingly, UK activity was impacted much more, by 56%, with the largest drop coming after the Referendum result.

The figures reflect market uncertainty following myriad shocks, but digging a bit deeper the story is more nuanced. The major drop came from larger deals, with the mid-market actually showing resilience in this difficult backdrop: the €10 million to €25 million EV segment actually saw more activity this year versus last, up from 79 deals to 97.

Next year should see a continuation of a strong mid-market, as business owners continue to strive to grow their businesses and seek partners to assist them with this. Businesses of this size tend to be less impacted by macro shocks and more focussed on their own growth plans. They may also be more UK-focussed and less international at that size and stage of development, meaning there is a compelling case for partnering and helping internationalise the business.

As uncertainty tends to breed a flight to familiarity, we will likely see investors stick to the areas they know. The UK has long been renowned as a strong economy with a thriving entrepreneur base, and though deal activity has slowed in 2016 after June, there are signs that 2017 will see it rebound: a number of funds have raised capital, highlighting institutional investors’ belief in the country as a strong prospect for generating returns.

We will likely see an increase in active and supportive portfolio management, as investors take stock to ensure their target companies are well equipped to navigate 2017. A large part of this will be bolt-on activity: a flat market tends to be an excellent time to help businesses grow through acquisition. This is not only because entry pricing may be a bit subdued, but also because lenders tend to be more willing to back known targets rather than put money to work in new ones where the risk may be perceived to be greater. Herein lies an excellent opportunity for seasoned GPs to carefully build up some platform businesses.

History has taught us that many of today’s largest brands were created in times of uncertainty – Disney, for example, was founded in the early 1920s while Microsoft was set up in the early 1970s. While today’s backdrop is far from dire, it is indeed fraught with uncertainty and thus business owners – and their backers – must think and act more diligently than ever. 2017 will thus be about the ability to adapt to an increasingly unpredictable backdrop, with experienced mid-market private equity professionals with clear and proven investment strategies well placed to thrive.

Why private equity

All financing options when funding a business comes with strings attached. With private equity and venture capital, these strings are at their tightest. Private equity deals can easily run into millions of pounds, but sceptics constantly warn that business owners may end up losing control of their company.

A private equity fund invests in companies and looks to sell its stake about five years later for a substantial profit.

While venture capital focuses on early-stage companies with high growth potential, private equity firms invest in a much wider range of companies, including mature firms that have been trading for a long time that may need funding to propel growth or recover from financial troubles.

In return for this large investment, private equity firms expect a large stake in the business and want to take the reins of the business so that they can generate value from it.

Philip Rattle is the managing partner at August Equity.

The M&A Guide 2017 is supported by Clydesdale & Yorkshire Bank, EMC, Kingston Smith, Knight Corporate Finance, and Squire Patton Boggs. To read more, download the guide for free here

Praseeda Nair

Kellen Rempel

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.