In a post crisis world private equity can play a vital role

Even the best entrepreneurial businesses need capital to grow and develop. Private equity is very much open to business.

What we need are bright, ambitious people who will help kick-start the process of recovery. But who are these people? They are called entrepreneurs and they are engines for growth. It is they who will help get the UK out of the mess that it’s in. The best that the government can do is to create the playing field for growth and then get out the way to let them do what comes naturally.

Capital requirements

Before the financial crisis there was a wide range of sources of external finance: banks, private equity and venture capital and stock markets. They all had an important re to play in financing enterprise and growth.

Now, post financial crisis, the banks’ role is much diminished. The conflicting forces of market demand and increasing regulation mean that banks have had to become more choosy about who they lend to and, often, it’s the smaller companies that are going to feel this change all too painfully.

Similarly, stock markets are increasingly volatile and risk averse. This has been highlighted in recent weeks by the pulling of a number of high profile IPOs and, since the turn of the year, there have been just 13 listings on AIM (the majority of which have been overseas mining and oil and gas companies).

Private equity too has had its knocks. It was demonised at the end of the financial boom. I know – I was there in my role as chairman of the British Venture Capital and Private Equity Association at the Treasury Select Committee in 2007 arguing the case for private equity as a force for good in the face of politicians who either didn’t understand or did not want to know because they had their own agenda.

But private equity has shown remarkable resilience in the face of the worst economic downturn in living memory. Of course, not everyone has made it through in quite the same way, but largely, private equity is recovering reasonably well and vast swathes of private equity-backed firms have not gone bust to the irritation of some of the doomsayers.

See also: The essential guide to raising private equity – Private equity investors are always looking for the next big thing and they will offer their expertise for a slice of future profits.

Overall, the industry remains very well funded and is keen to invest. Why? Because looking back at other downturns, the evidence suggests that some of the best returns were made in the period just as the economy started to recover.

Private equity is not just about money. It involves so much more. To do well the very best private equity players understand that they need to add value to their investments. The days of buying cheap or leveraging up are gone. Nor can you rely on getting out at a higher multiple than you went in on without putting some hard work into it.

What does adding value mean? It means building a better business, one that is fit to take on the challenges of its own particular markets and succeeding. It means a business that embraces change as the status quo and where innovation is prized and encouraged.

The 3 Ps: People, platform and positioning

The best private equity houses have their own particular approach to adding value, such as 100-day plans and value creation strategy days. At ISIS we build ours around our own particular methodology, the “3 Ps” – people, platform and positioning. It is how we assess a business and how we look to create value from it.

So, taking each in turn, what we look at are firstly the people – quite often, entrepreneurial businesses are driven by one or two key individuals, but do they have the board expertise around them to take that company to the next level? If the answer is no, then we use our network to identify highly experienced experts such as finance directors, chairmen and others who have been through similar issues before and can help to guide the business through its particular situation to the other side.

On platform, we look at the business and its operating infrastructure and processes – does it have the right IT and financial systems in place? Does it have the right logistics and delivery strategy? And if not, how can we invest to make it better?

And lastly, the positioning – how does the business stack up against its key competitors? How well does it understand its customers? How can we improve its brand and market proposition?

Many private equity houses now have portfolio teams and operating partners – seasoned industry professionals – that can be deployed to help develop and implement the value strategy. This is all to the benefit of the entrepreneur and is about giving them the best possible chance to succeed in realising the strategic vision.

While the banks and stock markets have their own issues, private equity is very much open for business. What we need now are ambitious, entrepreneurial businesses to back and grow for the future.


Andres Schmitt

Wol Kolade is Managing Partner at Livingbridge, a global mid-market private equity firm with offices across the UK, Australia and the US.

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