Have interest rates peaked? No-one can be sure, but what does seem certain is that they will remain far higher than they’ve been in years for some time to come, and households and businesses alike are scrambling to adjust to the sharp and sudden rise.
Some companies are facing the painful realisation that while funding their operations on debt worked well in a benign environment, it can be extremely tough when the cost of borrowing soars.
The danger of being over-geared is coming home to roost, and the solution is having to restructure balance sheets or think laterally in terms of how best to bolster their finances going forward. Amid all the uncertainty, what small and medium-sized businesses (SMEs) need now is a stable funding base. And private equity can provide it.
Patient capital provides permanence - with pragmatism
Private equity is often called ‘patient capital’ – and with good reason. Private equity investors want a return but they are not looking for a get rich quick scheme. They are happy to back business development and growth over the long term, usually between three to five years, and are prepared to wait for their rewards. That gives SMEs a huge amount of reassurance about the ongoing strength of their financial position for the years ahead, whatever challenges are thrown at them or opportunities arise.
It gives them the confidence to go for growth, knowing that the capital is in place and their investors are behind their business plan – and that, crucially, they will have the time they need to achieve it. It provides a buffer to help them weather storms. It can also provide a succession solution via an outright change of ownership or a partial transfer of shareholdings.
Private equity is also pragmatic. If follow-on funding is required, investors may well be prepared to extend it, if doing so would further the growth plan or promote business success. For instance, if an unforeseen acquisition prospect or chance to penetrate a new market presented itself there’s the potential to be opportunistic. PE investors are keen for their investments to thrive, and that flexibility can transform a business’ fortunes, allowing them to be agile as the environment evolves. After all, conditions in two or three years’ time may look very different to today.
Supportive and steady
Stability also comes from the partnership SMEs are entering into and the practical assistance they should expect to receive. Private equity investors can bring benefits beyond bolstering balance sheets. They can give general guidance or specific advice on key issues to management and the board, on issues such as developing strategy or navigating unforeseen challenges. And they can bring their networks and experience to bear where necessary, for instance to identify suitable candidates to fill key leadership positions such as a CFO or chair.
So it’s important businesses choose an investor they feel they can work well with for the next few years, who speaks their language and is on board with the same goals – both now and in the future. There should be more on offer than money.
Some SMEs think that private equity is only for big businesses who attract the interest of the large buy-out firms because those deals get all the headlines. In fact, there’s a thriving market out there for mid-market PE players keen to give small and medium-sized businesses the solid financial grounding they need to reach their potential or maintain their momentum. Private equity firms have plenty of “dry powder” to deploy. Once they’ve done so, they want their investments to succeed and so they should give them all the help they need to get where they’re going. Stable, supportive and steady does it.
About Connection Capital
Connection Capital provides private professional investors with access to direct private equity transactions and alternative investment funds that are usually only available to institutional investors.
It has raised over £500 million of funds (as at 30 September 2023), from its clients, which has been invested across a diverse portfolio including Virgin Wines, Tempcover, and 23.5 Degrees, the UK’s first Starbuck’s franchise, as well as private fund strategies operated by institutional grade private managers such as CVC, 17Capital, InvestIndustrial and Enact.
Investment opportunities are identified and negotiated by Connection Capital, which also carries out all due diligence and manages the investment from completion through to exit, on its clients’ behalf. Connection Capital is authorised and regulated by the Financial Conduct Authority.
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