In the previous text, we explored two situations in response to the question “Why can it be good to receive a Private Equity investment?”. These were: (i) capital and experience for inorganic growth and (ii) reduction of exposure to business risk for the entrepreneur. As we indicated at the end, there are three additional circumstances under which it may be advantageous to receive a Private Equity investment:
- Inheritance Planning
There are recurring cases of succession proceedings of family companies in which not all children have an interest in being a company executive. In these cases, it may be very useful for the family to have a partner-investor, who helps organize management and establish good corporate governance practices in the company. Thus, children who remain in the business must obey the rules of governance in the best interests of the company and the other children will be assured that there will be no conflicts of interest among those who remain. That is, in addition to the rules, there will be another impartial shareholder who will aim for the best results for the company.
In the same way, it can be difficult to accurately value the business to support the dividing up of other assets which are to be transferred to the heirs. The investor’s introduction into the company is always preceded by establishing the stock price, which solves this problem, as well as freeing up other assets and liquidity from the family for transfer to the heirs.
- Corporate restructuring with the implementation of corporate governance
Similarly to the aforementioned points regarding succession planning, in companies where issues between members can or need to be solved by the total or partial exit of a shareholder or group, the input of a financial investor is valuable. It provides resources to acquire such participation, and at the same time promotes the organization of corporate governance for the withdrawal of eventual conflicts of interest between the parties. Additionally, it results in the formatting of professional executive management, independent of the specific interests of each shareholder or group of shareholders. However, it is rare for investors to have an interest in raising funds in a litigious company, so conflicts need to be resolved in advance, with shareholders always acting in the best interests of the company, rather than in their own.
Finally, we discuss the most common reason:
- Growth capital
The entrepreneur repeatedly discovers or develops several growth opportunities in the business he/she operates, which demand capital to be made viable . These opportunities are usually “in the drawer”, either because there are no cash flow resources available to explore them further, or because the entrepreneur does not want to risk being exposed to high debt for such projects. A good way to resolve this impasse is to bring in a partner-investor with such additional capital.
In addition to the financial aspect, the entrepreneur usually has an excellent business and operational profile as well as a good strategic vision for the business. However, the company can develop greatly with the support of the investor, in terms of both professional financial management and corporate governance. The investor can help to organize the procedures for decision-making in the company, and therefore reduce dependency on the entrepreneur as an executive in the administrative-financial management of the company. In addition, the rules are clear among the executives and partners, and the entrepreneur can divide the risk of the strategic decisions that are only his. Introducing a professional investor into the company also improves the relationship with the financial market for access to finance. Lenders become more confident with quality information, prepared professionals and a shareholder-investor who has a benchmark of good practices, thereby reducing the company’s credit risk.