Private equity: Finding a match
Article Date: Jul 18 2006
in partnersip with Ernst & Young:
The primary reason for seeking funding from a private equity backer is, of course, to raise capital. But increasingly management teams are finding that it is not the financial terms that differentiate one equity provider from the next. We talk to The Works and Robinia Healthcare about what makes one PE investor stand out from the rest.
Private equity has the capacity to be of enormous benefit to the right type of business – one that is strong, fast growing and entrepreneurial and poised for significant growth. In a market where the funds available for private equity houses to invest exceed the number of good-quality investment opportunities available, management teams are increasingly able to exert an element of choice over the private equity backer – although it is more likely in a secondary buyout, given that the management has already experienced at least one buy-out, and that they will have a successful track record prior to the secondary buy-out.
'In general, the first time round with a management buy-out you are just trying to raise the money and don’t tend to consider choosing between backers; with a secondary buy-out it is definitely more of a beauty parade. You are aware that you will have to work with the private equity house, and you need to feel comfortable with them, they will be sitting at your board table for several years,' according to Terry Norris, who led a management buy-out at discount book retailer The Works in 2003, and was non-executive chairman there until it was bought by Hermes Private Equity in a secondary buy-out in April 2005.
The ‘secondary buy-out’ is a more recent feature of the maturing private equity market – where the private equity house which backed an earlier buy-out is enabled to exit its investment by selling its stake to another private equity house. Secondary buy-outs often provide fresh stimulus to the business with new capital and often one or more new non executive directors who are frequently a valuable source of contacts and knowledge to the management team.
'In 2003 the management team at The Works had been trying to buy the business for a year, and the vendor had been trying to sell for eighteen months,' Norris says. Their advisors contacted Norris because of his extensive experience with retail roll-outs. “I looked at the opportunity and couldn’t understand why they had been struggling to complete a deal. I met the company and it was agreed I should become chairman elect, take the deal out of Birmingham and bring it to London to make a fresh start. Chris Maddox, the managing director, and I planned to present to several – five or six – venture capital firms.
'Primary Capital (the eventual investors) showed tremendous enthusiasm from the first time we met, and we had a second meeting with them before we had presented to all the other potential VCs. We received two offers almost immediately, and I’m sure we would have had a third, except that Primary Capital moved so quickly that the others were left out in the cold. What helped was Primary’s huge enthusiasm from day one, and also that they accepted the management team’s business plan as it stood. We were delighted to get such a good reaction – we weren’t really thinking of selecting a venture capital backer, but just getting the deal done.
'Graham Heddle from Primary Capital had led the deal, and then joined the board as their special director. He was continually enthusiastic about The Works – each time he visited a store he came out with armfuls of books,' Norris says.